Hock Section A Questions

Hock 2020 Part 1
Section A – External Financial Reporting Decisions

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Financial Statements - Other Than Statement of Cash Flows 22
Financial Statements - Statement of Cash Flows 45
Financial Statements - Integrated Reporting 9
Cash & Cash Equiv., Accounts Receivable, and Inventory 62
Investments, PP&E (Fixed Assets), and Intangible and Other Assets 57
Liabilities and Taxes 27
Profitability Ratios and Profitability Analysis 1
Owners' Equity 31
Revenue Recognition 7
276
Financial Statements - Other Than Statement of Cash Flows

1. Question ID: ICMA 19.P1.010 (Topic: Financial Statements - Other Than Statement of Cash
Flows)
A company is preparing its financial statements in accordance with U.S. GAAP. Listed below are
select financial data for the company.
Net income = $950,000
Depreciation = $40,000
Investment by owners = $60,000
Unrealized gain on available-for-sale securities = $90,000
Foreign currency translation loss = $20,000
What is the amount that would be reported as comprehensive income?
 A. $1,120,000.
 B. $1,020,000.
 C. $1,060,000.
 D. $970,000.
Flows)
An income statement could be used by an external investor for all of the following
purposes except to
 A. analyze the company’s performance compared to the budget.

 B. assess the risk of the company achieving future profitability.
 C. compare the company’s results to those of its competitors.
 D. predict the company’s future revenues.
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3. Question ID: HOCK LR P2E 1 (Topic: Financial Statements - Other Than Statement of Cash
Flows)
The balance sheet (or statement of financial position) helps users to assess the liquidity, financial
flexibility, solvency and risk of a company. A company with financial flexibility has the ability to
 A. decide whether to settle a liability or write it off.

 B. respond to unexpected needs and opportunities.
 C. choose the valuation methods it will use to report its assets.
 D. meet its financial obligations as they come due.
4. Question ID: CIA 1192 P4 Q37 (Topic: Financial Statements - Other Than Statement of Cash
Flows)
Because of inexact estimates of the service life and the residual value of a plant asset, a fully
depreciated asset was sold in the current year at a material gain. This gain should be reported:
 A. As part of sales revenue on the current year income statement.

 B. In the income from continuing operations section of the current year income statement.
 C. As an adjustment to prior periods' depreciation on the statement of retained earnings.
 D. As an unusual or infrequent event in the unusual and infrequent events section of the current year
income statement.
Flows)
The statement of changes in stockholders' equity shows a
 A. listing of all stockholders' equity accounts and their corresponding dollar amounts.
 B. computation of the number of shares outstanding used for earnings per share calculations.
 C. reconciliation of the beginning and ending balances in the Retained Earnings account.
 D. reconciliation of the beginning and ending balances in the individual stockholders' equity accounts.
6. Question ID: ICMA 1603.P1.053 (Topic: Financial Statements - Other Than Statement of
Cash Flows)
All of the following are limitations of the balance sheet except that
 A. the balance sheet provides information on the liquidity and solvency of the company.
 B. assets and liabilities are usually recorded at historical cost, which might differ significantly from
current fair value.
 C. the balance sheet is prepared using management judgments and estimates.
 D. the balance sheet omits many items that cannot be recorded objectively but which have financial
value to the company.

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7. Question ID: HOCK MP2 AF16 (Topic: Financial Statements - Other Than Statement of Cash
Flows)
In times of rising prices, what effect does the use of the historical cost concept have on a company's
asset values and profit?
 A. Asset values will be overstated and profit understated in the financial statements.
 B. Asset values and profit will both be understated in the financial statements.
 C. Asset values will be understated and profit overstated in the financial statements.
 D. Asset values and profit will both be overstated in the financial statements.
Flows)
The financial statements included in the annual report to the shareholders are least useful to which
one of the following?
 A. Managers in charge of operating activities.

 B. Competing businesses.
 C. Stockbrokers.
 D. Bankers preparing to lend money.
Cash Flows)
A company’s net income totaled $12,000,000. The company had an unusual loss of $250,000, an
unrealized after-tax gain of $25,000 on available-for-sale debt securities, and a $900,000 distribution
of cash dividends. The company’s comprehensive income was
 A. $10,875,000.
 B. $11,775,000.
 C. $11,750,000.
 D. $12,025,000.
Flows)
All of the following are limitations to the information provided on the statement of financial
position except the
 A. quality of the earnings reported for the enterprise.

 B. judgments and estimates used regarding the collectibility, salability, and longevity of assets.
 C. omission of items that are of financial value to the business such as the worth of the employees.
 D. lack of current valuation for most assets and liabilities.

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11. Question ID: HOCK MP2 AF15 (Topic: Financial Statements - Other Than Statement of
Cash Flows)
The accounting concept or convention which, in times of rising prices, tends to understate asset
values and overstate profits, is the
 A. going concern concept.

 B. historical cost convention.
 C. conservatism concept.
 D. prudence concept.
12. Question ID: HOCK MP2 AF1 (Topic: Financial Statements - Other Than Statement of Cash
Flows)
According to the FASB conceptual framework, the objectives of financial reporting for business
enterprises are based on
 A. generally accepted accounting principles.

 B. the needs of investors and creditors in making decisions about providing resources to the entity.
 C. reporting on management's stewardship.
 D. the need for conservatism.
Cash Flows)
Blue Fox Industries had the following account balances at year end.
Sales $452,000
Cash 23,400
Accounts payable 14,300
Rent expense 3,700
Accounts receivable 9,400
Cost of goods sold 214,000
Land 104,000
Contract liability 6,800
Gain on sale 17,500
Equipment 28,800
Inventories 2,200
Notes payable 67,000
What is the amount of total current assets reported on the balance sheet?
 A. $59,300.

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 B. $63,800.
 C. $35,000.
 D. $39,900.
Cash Flows)
A company reported first quarter revenues of $10,000,000, gross profit margin of 25%, and
operating income of 15%. To reduce overhead expenses, a consultant recommends that the
company outsource some of its operating activities beginning with the second quarter. This
recommendation is anticipated to reduce operating expenses by 20% without affecting sales volume.
The company has an income tax rate of 35%. Assuming cost of sales remains at 75%, what is the
impact on the quarterly income statement if the company implements the recommendation?
 A. Operating expenses will be reduced by $300,000.

 B. Operating income will increase by $200,000.
 C. Gross profit will increase by 8.0%.
 D. Operating income will increase by 8.7%.
Flows)
When a fixed asset is sold for less than book value, which one of the following will decrease?
 A. Total current assets.

 B. Net working capital.
 C. Current ratio.
 D. Net profit.
Cash Flows)
The historical cost convention
 A. has been replaced in accounting records by a system of current cost accounting.

 B. fails to take into account changing price levels over time.
 C. values all assets at their cost to the business, without any adjustment for depreciation.
 D. records only past transactions.
Cash Flows)
Which of the following is the best definition of the going concern concept?
 A. The entity will continue in existence forever.

 B. The entity will continue in operational existence for the foreseeable future.
 C. The entity will continue to make profits for the foreseeable future.
 D. The entity will not incur losses in the next three years.

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Flows)
All of the following are elements of an income statement except
 A. expenses.
 B. gains and losses.
 C. revenue.
 D. shareholders' equity.
Cash Flows)
According to the FASB conceptual framework, revenue may result from
 A. An increase in a liability from incidental transactions.

 B. A decrease in a liability from primary operations.
 C. An increase in an asset from incidental transactions.
 D. A decrease in an asset from primary operations.
Flows)
When using fair value accounting, it would be to a firm's benefit to report the liability at fair value
when it has
 A. $28 million in outstanding bonds trading at $98.

 B. $25 million in putable bonds trading at $102.
 C. $50 million in variable rate preferred shares outstanding.
 D. $32 million in outstanding bonds trading at $101.
Cash Flows)
A company uses the calendar year as its financial results reporting time period. On May 31 of the
prior year, the company committed to a plan to sell a line of business. The sale represents a
strategic shift that will have a major effect on the company's operations and financial results. For the
period January 1 through May 31 of the prior year, the line of business had revenues of $1,000,000
and expenses of $1,600,000. The assets of the line of business were sold on November 30, at a loss
for which no tax benefit is available. In its income statement for the year ended December 31 of the
prior year, how should the company report the line of business operations from January 1 through
May 31?
 A. $600,000 should be reported as an unusual or infrequent loss.

 B. $1,000,000 and $1,600,000 should be included with revenues and expenses, respectively, as part of
continuing operations.
 C. $600,000 should be reported as part of the loss on disposal of a component.
 D. $600,000 should be included in the determination of income or loss from operations of a
discontinued component.

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Cash Flows)
According to U.S. GAAP, where on the income statement should a multinational company report the
loss from the disposal sale of a major operating unit?
 A. Report the loss, pretax, in a separate section between income from operations and income before
income tax.
 B. Report the loss, net of tax, in a separate section between income before tax and net income.
 C. Report the loss, pretax, in a separate section between income from continuing operations and net
income.
 D. Report the loss, net of tax, in a separate section between income from continuing operations and
net income.
Financial Statements - Statement of Cash Flows

23. Question ID: ICMA 19.P1.012 (Topic: Financial Statements - Statement of Cash Flows)
Which one of the following items could be identified on the cash flow statement prepared using the
indirect method?
 A. The payment of interest expense of $200,000.

 B. A change in unrealized holding gains of $50,000.
 C. A settlement of a lawsuit that was previously accrued.
 D. Depreciation related to buildings and equipment.
Carlson Company has the following payments recorded for the current period.
Dividends paid to Carlson shareholders $150,000

Interest paid on bank loan 250,000
Purchase of equipment 350,000
The total amount of the above items to be shown in the Operating Activities Section of Carlson's
Cash Flow Statement should be
 A. $350,000.
 B. $150,000.
 C. $250,000.
 D. $750,000.
25. Question ID: CMA 1296 P2 Q22 (Topic: Financial Statements - Statement of Cash Flows)
Which one of the following transactions should be classified as a financing activity in a statement of
cash flows?
 A. Sale of trademarks.
 B. Purchase of treasury stock.
 C. Purchase of equipment.

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 D. Payment of interest on a mortgage note.
All of the following are classifications on the Statement of Cash Flows except
 A. operating activities.
 B. equity activities.
 C. investing activities.
 D. financing activities.
For a manufacturing firm, which of the following would be included in cash outflows from financing
activities on the Statement of Cash Flows?
 A. Payment of salaries and wages.

 B. Repayment of the principal portion of firm's debt.
 C. Issuance of new stock.
 D. Interest payments on firm debt.
Selected financial information for Kristina Company for the year just ended is shown below.
Net income $2,000,000

Increase in accounts receivable 300,000
Decrease in inventory 100,000
Increase in accounts payable 200,000
Depreciation expense 400,000
Gain on the sale of available-for-sale debt securities 700,000
Cash received from the issue of common stock 800,000
Cash paid for dividends 80,000
Cash paid for the acquisition of land 1,500,000
Cash received from the sale of available-for-sale debt securities 2,800,000
Kristina's cash flow from investing activities for the year is
 A. $1,220,000.
 B. $1,300,000.
 C. $(1,500,000).
 D. $2,800,000.

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To calculate cash flows using the indirect method, which one of the following items must be added
back to net income?
 A. Revenue.
 B. Marketing expense.
 C. Depreciation expense.
 D. Interest income.
Royce Company had the following transactions during the fiscal year ended December 31, 20X1:
 Accounts receivable decreased from $115,000 on December 31, 20X0 to $100,000 on

December 31, 20X1.
 Royce's board of directors declared dividends on December 31, 20X1 of $0.05 per share on
the 2.8 million shares outstanding, payable to shareholders of record on January 31, 20X2. The
company did not declare or pay dividends for fiscal 20X0.
 Sold a truck with a net book value of $7,000 for $5,000 cash, reporting a loss of $2,000.
 Paid interest to bondholders of $780,000.
 The cash balance was $106,000 on December 31, 20X0 and $284,000 on December 31, 20X1.
The total of cash provided/used by operating activities plus cash provided/used by investing
activities plus cash provided/used by financing activities is
 A. cash used of $582,000.

 B. equal to net income reported for fiscal year ended December 31, 20X1.
 C. cash provided of $178,000.
 D. cash provided of $284,000.
With respect to the content and form of the statement of cash flows,
 A. the direct method of reporting cash flows from operating activities includes disclosing the major
classes of gross cash receipts and gross cash payments
 B. the indirect method adjusts ending retained earnings to reconcile it to net cash flows from
operations.
 C. accounting standards covering the statement of cash flows encourage the use of the indirect
method.
 D. the reconciliation of the net income to net operating cash flow need not be presented when using
the direct method.

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When using the indirect method to prepare a statement of cash flows, which one of the following
should be deducted from net income when determining net cash flows from operating activities?
 A. A loss on the sale of plant assets.

 B. Amortization of premiums on bonds payable.
 C. An increase in accrued liabilities.
 D. Depreciation expense.
Which one of the following should be classified as an operating activity on the statement of cash
flows?
 A. The payment of a cash dividend from money arising from current operations.
 B. The purchase of additional equipment needed for current production.
 C. A decrease in accounts payable during the year.
 D. An increase in cash resulting from the issuance of previously authorized common stock.
Which one of the following would result in a decrease to cash flow in the indirect method of
preparing a statement of cash flows?
 A. Amortization expense.
 B. Proceeds from the issuance of common stock.
 C. Decrease in income taxes payable.
 D. Decrease in inventories.

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35. Question ID: CIA 1188 P4 Q33 (Topic: Financial Statements - Statement of Cash Flows)
The following data were extracted from the financial statements of a company for the year ended
December 31:
Net income $70,000

Amortization of intangibles 1,000
Decrease in accounts receivable 2,000
Increase in inventories 9,000
Increase in plant assets 47,000
Increase in contributed capital 31,000
Decrease in short-term notes payable 55,000
There were no disposals of plant assets during the year. Based on the above, a statement of cash
flows will report a net increase in cash of
 A. $17,000
 B. $11,000
 C. $54,000
 D. $69,000
Larry Mitchell, Bailey Company's controller, is gathering data for the Statement of Cash Flows for the
most recent year end. Mitchell is planning to use the direct method to prepare this statement, and
has made the following list of cash inflows for the period.
 Collections of $100,000 for goods sold to customers.

 Securities purchased for investment purposes with an original cost of $100,000 sold for
$125,000.
 Proceeds from the issuance of additional company stock totaling $10,000.
The correct amount to be shown as cash inflows from operating activities is
 A. $100,000.
 B. $135,000.
 C. $225,000.
 D. $235,000.

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With respect to the statement of cash flows, the FASB Accounting Standards Codification® classifies
business transactions into operating, investing, and financing activities. All of the following should be
included in the reconciliation of net income to net operating cash flow except a(n)
 A. increase in income tax payable.

 B. decrease in prepaid insurance.
 C. purchase of land and building in exchange for a long-term note.
 D. decrease in inventory.
Garnett Company's year-end income statement shows the following.
Revenues $5,000,000
Selling and general expenses (including
depreciation expense of $200,000) 3,800,000
Interest expense 50,000
Gain on sale of equipment 40,000
Income tax expense (including long-term
deferred tax expense of $30,000) 320,000
Net income $ 870,000
During the year, Garnett's noncash current assets rose by $100,000, and current liabilities increased
by $150,000. On its statement of cash flows, Garnett would report Cash Provided by Operating
Activities of
 A. $1,190,000.
 B. $1,160,000.
 C. $1,080,000.
 D. $1,110,000.

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December 31, 20X1.
Royce Company uses the direct method to prepare its statement of cash flows at December 31,
20X1. The interest paid to bondholders is reported in the
 A. financing section, as a use or outflow of cash.

 B. operating section, as a use or outflow of cash.
 C. Debt section, as a use or outflow of cash.
 D. Investing section, as a use or outflow of cash.
Selected financial information for Kristina Company for the year just ended is shown below.
Net income $2,000,000

Increase in accounts receivable 300,000
Decrease in inventory 100,000
Gain on the sale of available-for-sale debt securities 700,000
Cash received from the issue of common stock 800,000
Cash paid for dividends 80,000
Cash paid for the acquisition of land 1,500,000
Cash received from the sale of available-for-sale debt securities 2,800,000
Kristina's cash flow from financing activities for the year is
 A. $720,000.
 B. $3,520,000.
 C. $800,000.
 D. $(80,000).

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The net income for Cypress Inc. was $3,000,000 for the year ended December 31. Additional
information is as follows:
Depreciation on fixed assets $1,500,000

Gain from cash sale of land 200,000
Dividends paid on preferred stock 400,000
The net cash provided by operating activities in the statement of cash flows for the year ended
December 31 should be
 A. $4,600,000
 B. $4,800,000
 C. $4,200,000
 D. $4,500,000
When using the statement of cash flows to evaluate a company’s continuing solvency,
the most important factor to consider is the cash
 A. balance at the end of the period.

 B. flows from (used for) investing activities.
 C. flows from (used for) operating activities.
 D. flows from (used for) financing activities.
In preparing a statement of cash flows using the indirect method of determining cash flows from
operating activities, what adjustment is needed to net income because of (1) an increase during the
period in prepaid expenses and (2) the periodic amortization of premium on bonds payable?
 A. (1) Add (2) Add

 B. (1) Deduct (2) Add
 C. (1) Deduct (2) Deduct
 D. (1) Add (2) Deduct

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December 31, 20x1.
Royce Company uses the indirect method to prepare its 20X1 statement of cash flows. It reports
a(n)
 A. addition of $2,000 in the operating section for the $2,000 loss on the sale of the truck.
 B. source or inflow of funds of $5,000 from the sale of the truck in the financing section.
 C. deduction of $15,000 in the operating section, representing the decrease in year-end accounts
receivable.
 D. use or outflow of funds of $140,000 in the financing section, representing dividends.
Barber Company has recorded the following payments for the current period.
Interest paid on bank loan $300,000

Dividends paid to Barber shareholders 200,000
Repurchase of Barber Company stock 400,000
The amount to be shown in the Financing Activities section of Barber's Cash Flow Statement should
be
 A. $900,000
 B. $600,000
 C. $500,000
 D. $300,000
When preparing the statement of cash flows, companies are required to report separately as
operating cash flows all of the following except
 A. Interest received on investments in bonds.

 B. Cash dividends paid on the company's stock.
 C. Cash collected from customers.
 D. Interest paid on the company's bonds.

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The following information was taken from the accounting records of Oak Corporation for the year
ended December 31:
Proceeds from issuance of preferred stock $4,000,000

Dividends paid on preferred stock 400,000
Bonds payable converted to common stock 2,000,000
Payment for purchase of machinery 500,000
Proceeds from sale of plant building 1,200,000
2% stock dividend on common stock 300,000
Gain on sale of plant building 200,000
The net cash flows from investing and financing activities that should be presented on Oak's
statement of cash flows for the year ended December 31 are, respectively
 A. $900,000 and $3,600,000.

 B. $900,000 and $3,900,000.
 C. $700,000 and $3,900,000.
 D. $700,000 and $3,600,000.
The sale of available-for-sale debt securities should be accounted for on the statement of cash flows
as a(n)
 A. investing activity.
 B. noncash investing and financing activity.
 C. operating activity.
 D. financing activity.
business transactions into operating, investing, and financing activities. Which one of the following
transactions should not be classified as a financing activity?
 A. Income tax refund.

 C. Issuance of common stock.
 D. Payment of dividends.

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During the year, Deltech Inc. acquired a long-term productive asset for $5,000 and also borrowed
$10,000 from a local bank. These transactions should be reported on Deltech’s Statement of Cash
Flows as
 A. Outflows for Operating Activities, $5,000; Inflows from Financing Activities, $10,000.
 B. Inflows from Investing Activities, $10,000; Outflows for Financing Activities, $5,000.
 C. Outflows for Investing Activities, $5,000; Inflows from Financing Activities, $10,000.
 D. Outflows for Financing Activities, $5,000; Inflows from Investing Activities, $10,000.
When using the indirect method to prepare the statement of cash flows, the impairment of goodwill
should be presented as a(n)
 A. deduction from net income.

 B. cash flow from investing activities.
 C. investing and financing activity not affecting cash.
 D. addition to net income.
All of the following should be adjustments to net income in calculating cash flows from operating
activities using the indirect method of preparing the operating activities section of a statement of
cash flows except a
 A. decrease in inventory.
 B. purchase of land and building in exchange for a long-term note.
 C. depreciation expense.
 D. decrease in prepaid insurance.
A company has purchased an asset with a 10-year useful life. It will use an accelerated depreciation
method for tax purposes. For reporting purposes, it will use straight-line depreciation because this
method is believed to reflect better the usage of the asset over its economic life.
When applying the indirect method of calculating an entity's net operating cash flows, using financial
statements prepared for tax purposes rather than accrual accounting purposes will result in
 A. No effect on cash flow amounts.

 B. An overstatement of cash flows in the early years and then an understatement of cash flows in the
later years of the economic life of depreciable assets.
 C. An overstatement of cash flows throughout the economic life of depreciable assets.
 D. An understatement of cash flows throughout the economic life of depreciable assets.

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Atwater Company has recorded the following payments for the current period.
Purchase Trillium stock $300,000

Dividends paid to Atwater shareholders 200,000
Repurchase of Atwater Company stock 400,000
The amount to be shown in the Investing Activities Section of Atwater’s Cash Flow Statement should
be
 A. $900,000.
 B. $500,000.
 C. $700,000.
 D. $300,000.
A financial statement includes all of the following items: net income, depreciation, operating
activities, and financing activities. What financial statement is this?
 A. Balance sheet.
 B. Statement of cash flows.
 C. Statement of changes in stockholders' equity.
 D. Income statement.
In preparing a statement of cash flows, an item included in determining net cash flow from operating
activities is the
 A. purchase of treasury stock.

 B. amortization of a bond premium.
 C. proceeds from the sale of equipment for cash.
 D. cash dividends paid.
In a statement of cash flows (indirect method), depreciation expense should be presented as:
 A. an outflow of cash.
 B. an addition to net income in converting net income to net cash flows from operating activities.
 C. a deduction from net income in converting net income to net cash flows from operating activities.
 D. an inflow of cash.

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A reader of a statement of cash flows wishes to analyze the major classes of cash receipts and cash
payments from operating activities. Which methods of reporting cash flows from operating activities
will supply that information?
 A. Only the indirect method.

 B. Neither method.
 C. Both the direct and indirect methods.
 D. Only the direct method.
When using the indirect method to prepare a statement of cash flows, net cash flows from operating
activities are determined by adding back or deducting from net income those items included in net
income that had no effect on cash. Which one of the following items should be deducted from net
income when determining net cash flows from operating activities?
 A. An increase in accrued liabilities.

 B. A loss on the sale of plant assets.
 C. A decrease in accounts receivable.
 D. Amortization of a premium on a bond payable.
Which of the following items is specifically included in the statement of cash flows?
 A. Acquiring an asset by means of a loan where the lender sends the loan proceeds directly to the
seller of the asset.
 B. Conversion of debt to equity.
 C. Operating and nonoperating cash flow information.
 D. Purchasing a building by giving a mortgage to the seller.
Depreciation expense is added to net income under the indirect method of preparing a statement of
cash flows in order to
 A. report all assets at gross book value.

 B. reverse noncash charges deducted from net income.
 C. ensure depreciation has been properly reported.
 D. calculate net book value.

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Madden Corporation's controller has gathered the following information as a basis for preparing the
Statement of Cash Flows. Net income for the current year was $82,000. During the year, old
equipment with a cost of $60,000 and a net carrying value of $53,000 was sold for cash at a gain of
$10,000. New equipment was purchased for $100,000. Shown below are selected closing balances
for last year and the current year.
Last Year Current Year

Cash $ 39,000 $ 85,000
Accounts receivable, net 43,000 37,000
Inventories 93,000 105,000
Equipment 360,000 400,000
Accumulated depreciation-equipment 70,000 83,000
Accounts payable 22,000 19,000
Notes payable 100,000 100,000
Common stock 250,000 250,000
Retained earnings 93,000 175,000
Madden's cash inflow from operating activities for the current year is
 A. $63,000.
 B. $73,000.
 C. $93,000.
 D. $83,000.
cash receipts and cash payments as arising from operating, investing, and financing activities. All of
the following should be classified as investing activities except
 A. cash outflows to purchase manufacturing equipment.

 B. cash outflows to lenders for interest.
 C. cash inflows from the sale of bonds of other entities.
 D. cash inflows from the sale of a manufacturing plant.

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Select the combination below that explains the impact of credit card interest incurred and paid during
the period on (1) equity on the balance sheet and (2) the statement of cash flows.
 A. (1) Decrease (2) Operating outflow

 B. (1) No effect (2) Operating outflow
 C. (1) No effect (2) Financing outflow
 D. (1) Decrease (2) Financing outflow
All of the following should be classified as investing activities in the statement of cash flows except
 A. cash inflows from the sale of a manufacturing plant.

 B. cash outflows to creditors for interest.
 C. cash inflows from the sale of bonds of other entities.
 D. cash outflows to purchase manufacturing equipment.
In the statement of cash flows, the payment of common share dividends appears in the _____
activities section as a _____ of cash.
 A. Financing, Use
 B. Investing, Use
 C. Investing, Source
 D. Operating, Source
A statement of cash flows is intended to help users of financial statements
 A. determine a firm's components of income from operations.

 B. evaluate a firm's liquidity, solvency, and financial flexibility.
 C. determine whether insiders have sold or purchased the firm's stock.
 D. evaluate a firm's economic resources and obligations.

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Financial Statements - Integrated Reporting

68. Question ID: HOCK CMA.P1A.04 (Topic: Financial Statements - Integrated Reporting)
Keys Co., a manufacturer of keyboards, incorporates non-financial information into its analysis,
reporting, and decision-making. Keys Co. is practicing
 A. Integrated thinking.
 B. Global citizenship.
 C. Shareholder wealth growth.
 D. Compliance with international standards.
69. Question ID: ICMA 19.1A1e.01 (Topic: Financial Statements - Integrated Reporting)
A leading manufacturer of electric vehicles has accumulated customer driving interaction data
through its unique pilot driver-assist program. This data will be used to further develop more
advanced autonomous features that the company plans to implement in the near future on its most
popular model. In integrated reporting, the system used to accumulate and analyze the driving data
is best categorized as
 A. natural capital.
 B. manufactured capital.
 C. human capital.
 D. intellectual capital.
The earliest framework for reporting on social responsibility and sustainable development was
developed by the
 A. European Commission.
 B. Global Reporting Initiative (GRI).
 C. International Integrated Reporting Council.
 D. ISO 26000.
Corporate social responsibility focuses on
 A. Profit sharing.
 B. The impact the organization has on society.
 C. The corporation’s responsibility to earn a return for its shareholders.
 D. Meeting the needs of the present without compromising the ability of future generations to meet their
needs.

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Greener Grocers, Inc., publishes an integrated report in which the company reports on its non-
financial activities. In the section of its report where it discusses its activities that benefit and improve
the lives of the people in the communities where it is located, such as donating to food pantries, it is
reporting on which type of capital?
 A. Natural capital.
 B. Social and relationship capital.
 C. Financial capital.
 D. Human capital.
Integrated reporting is defined in the International < IR > Framework as
 A. Reporting on the organization’s use of externalities to create value.

 B. Reporting on management’s decisions with respect to corporate citizenship.
 C. Reporting on the social capital an organization uses in producing and providing products and
services.
 D. A process that results in a periodic integrated report by an organization about value creation over
time.
Value creation in the context of integrated reporting is
 A. A process that optimizes financial performance for the benefit of an organization’s shareholders.
 B. A process caused by the organization’s business activities and outputs that results in increases,
decreases, or transformations of its capitals.
 C. A process that optimizes financial performance for the benefit of all its stakeholders.
 D. Usage of the organization’s capitals to build wealth.
An integrated report should contain which of the following?
 A. Competitive intelligence.
 B. Risks and opportunities.
 C. Customer demographics.
 D. Internal usage of data and information technology.
Which of the following is not an element of the value creation process as communicated in an
integrated report?
 A. The organization’s history.

 B. The organization’s external environment.

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 C. The organization’s outlook.
 D. The organization’s business model.
Cash & Cash Equiv., Accounts Receivable, and Inventory

77. Question ID: CMA 1295 P2 Q27 (Topic: Cash & Cash Equiv., Accounts Receivable, and
Inventory)
Jordan Inc. is a profitable company with the goal to maximize cash flow. A valid reason for
Jordan not to adopt the last-in, first-out (LIFO) method of inventory valuation is
 A. The company has high administrative costs.

 B. Prices are falling.
 C. The reduction effect on inventory.
 D. Prices are rising.
Inventory)
All sales and purchases for the year at Ross Corporation are credit transactions. Ross shipped
goods via FOB shipping point. In error, the goods were not recorded as a sale and were included in
ending inventory. Which one of the following statements is correct?
 A. Accounts receivable was understated, inventory was overstated, sales were understated, and cost
of goods sold was understated.
 B. Accounts receivable was not affected, inventory was overstated, sales were understated, and cost
 C. Accounts receivable was understated, inventory was not affected, sales were understated, and cost
 D. Accounts receivable was understated, inventory was overstated, sales were understated, and cost
of goods sold was overstated.
79. Question ID: CIA 594 P4 Q29 (Topic: Cash & Cash Equiv., Accounts Receivable, and
Inventory)
Which of the following is true regarding the assignment (pledging as collateral) of accounts
receivable and factoring of accounts receivable for a manufacturing firm?
 A. The factoring of accounts receivable involves the invoice from the manufacturing firm to its customer
being stamped with a notification that payment is to be made directly to the other party, whereas the
assignment of accounts receivable does not.
 B. The lender has recourse to the manufacturing firm under factoring but not under the assignment of
accounts receivable.
 C. The factoring of accounts receivable provides collateral for the manufacturing firm, whereas the
assignment of receivables provides direct financing.
 D. The assignment of accounts receivable involves the invoice from the manufacturing firm to its
customer being stamped with a notification that payment is to be made directly to the other party,
whereas the factoring of accounts receivable does not.

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80. Question ID: HOCK CMA.P1A1.01 (Topic: Cash & Cash Equiv., Accounts Receivable, and
Inventory)
Central Merchandising has two divisions, Northern Division and Southern Division. Central maintains
four checking accounts: an operating account and a payroll account for each division. Northern
Division’s checking accounts are at Snow State Bank, close by its Northern Division, and Southern
Division’s checking accounts are at Sun State Bank, near its Southern Division.
Central maintains a separate general ledger Cash account for each of the four checking accounts.
On December 31, 20X5, Central Merchandising had the following balances in its four checking
accounts, according to its general ledger:
Snow State Bank Operating Account $ 20,000

Snow State Bank Payroll Account $ 4,000
Sun State Bank Operating Account $ (15,000)
Sun State Bank Payroll Account $ 5,000
Because of the overdrawn condition of the Sun State Operating Account per the general ledger,
Southern Division’s accounts payable department is holding several accounts payable checks
written on the account and will not mail them until they can be reasonably certain there will be funds
available in the account to cover them by the time they reach the bank for payment. Checks being
held for mailing total $7,000.
What cash balance should Central Merchandising report on its balance sheet for December 31,
20X5?
 A. $14,000
 B. $24,000
 C. $21,000
 D. $31,000
Inventory)
An "aging schedule" is used to
 A. Determine depreciation pools.

 B. Classify categories of workers.
 C. Estimate the net realizable value of accounts receivable.
 D. Estimate inventory obsolescence.

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Inventory)
Sawyer Corporation is a wholesaler of industrial air compressor parts. The activity for Part Number
C-588 during May is as follows.
Unit Total
May Transaction Units Cost Cost
1 Inventory 1,400 $2.45 $3,430
7 Purchase 1,800 2.75 4,950
16 Sales 2,000
20 Purchase 1,500 2.90 4,350
28 Sales 1,400
If Sawyer uses a first-in, first-out perpetual inventory system, the total cost of the inventory for Part
Number C-588 at May 31 is
 A. $3,230
 B. $3,770
 C. $3,575
 D. $3,510

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Inventory)
Brighton Corporation uses the allowance method of accounting for bad debts on its internal reports
and has used a historical rate of 1.5% of credit sales to estimate its bad debt expense. The aging
schedule of Brighton's accounts receivable at November 30, 20X4, based upon past collection
experience is presented as follows.
Days Probability
Outstanding Amount of Collection
0-30 days $640,000 0.98
31-60 days 180,000 0.92
61-90 days 95,000 0.75
over 90 days 40,000 0.60
$955,000
Total sales for the 20X3-X4 fiscal year were $6,500,000, of which 85% were on credit. The
allowance for uncollectible accounts had a credit balance of $76,500 on December 1, 20X3, and a
debit balance of $3,400 on November 30, 20X4, before any entry to record bad debt expense for the
20X3-X4 fiscal year.
The amount of the accounts receivable written off by Brighton Corporation during the 20X3-X4 fiscal
year is
 A. $79,900
 B. $79,475
 C. $76,500
 D. $73,100
Inventory)
Woody Company sold $150,000 of its accounts receivable without recourse. The purchaser
assessed a finance charge of 5%. Woody should record
 A. A debit to cash of $150,000.

 B. A credit to accounts receivable of $150,000
 C. A credit to liability on transferred accounts receivable of $150,000.
 D. Interest expense of $7,500.

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Inventory)
The allowance method of recording bad debt expense is preferred over the direct write-off method
because it
 A. Is easier to implement.
 B. Achieves a proper matching of expenses and revenues.
 C. "Allows" for discrepancies.
 D. Is more flexible.
Inventory)
Days Probability
0-30 days $640,000 0.98
31-60 days 180,000 0.92
61-90 days 95,000 0.75
over 90 days 40,000 0.60
$955,000
If Brighton Corporation determines its bad debt expense by using the aging schedule of its accounts
receivable, the bad debt expense for the 20X3-X4 fiscal year would be
 A. $79,475
 B. $82,875
 C. $70,350
 D. $66,950

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Inventory)
Madison Corporation uses the allowance method to value its accounts receivable and is making the
annual adjustments at fiscal year end, November 30. The proportion of uncollectible accounts is
estimated based on past experience, which indicates 1.5% of net credit sales will be uncollectible.
Total sales for the year were $2,000,000 of which $200,000 were cash transactions. Madison has
determined that the Norris Corporation accounts receivable balance of $10,000 is uncollectible and
will write off this account before year-end adjustments are made. Listed below are Madison's
account balances at November 30 prior to any adjustments and the $10,000 write-off.
Sales $2,000,000
Sales discounts (125,000)
Allowance for doubtful accounts (16,500)
Sales returns and allowances (175,000)
Bad debt expense 0
After a suggestion from the company's external auditors, Madison wishes to value its accounts
receivable using the balance sheet approach instead. The chart below presents the aging of the
accounts receivable subsidiary ledger accounts at November 30, not including the account to be
written off.
Accoun Balance <60 61-90 91-120 >120

t Due days days days days
Arcadia $ 50,000 $ 50,000
Dawson 128,000 90,000 $ 38,000
Gracelo
327,000 250,000 77,000
n
Prentiss 25,000 $25,000
Strauss 210,000 210,000
Total $740,000 $390,000 $115,000 $210,000 $25,000

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% uncollectible 1% 5% 15% 40%
The final entry to the related accounts is
 A. Credit accounts receivable for $34,650 and debit bad debt expense for $34,650.
 B. Debit allowance for doubtful accounts for $44,650 and credit bad debt expense for $44,650.
 C. Credit allowance for doubtful accounts for $44,650 and debit bad debt expense for $44,650.
 D. Debit allowance for doubtful accounts for $34,650 and credit sales for $34,650.
Inventory)
Nasus Company began the month of November with 150 units of Model-XL brass hinges on hand at
a cost of $2.00 each. These hinges sell for $3.50 each. The following schedule presents the
additional activity in this inventory item during November.
Qty. Unit Units

Nov. Recd. Price Sold
4 100
6 200 $2.10
8 150
10 200 2.20
16 220
21 250 2.40
28 100
If Nasus uses the periodic weighted average inventory pricing, the gross profit for November would
be:
 A. $1,041
 B. $741
 C. $1,254
 D. $758

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Inventory)
This information concerns items in Wilson's inventory.
Cameras Lenses Tripods

Historical cost per unit $210.00 $110.00 $53.00
Selling price per unit 217.00 145.00 73.75
Cost to distribute per unit 19.00 8.00 2.50
Current replacement cost per unit 203.00 109.00 51.00
Normal profit margin per unit 32.00 29.00 21.25
Assume that Wilson uses the LIFO cost flow assumption to value its inventory and determine its cost
of goods sold. The limits to the designated market value (i.e., the ceiling and the floor, respectively)
that should be used in the lower of cost or market comparison for cameras are
 A. $198 and $166.

 B. $217 and $198.
 C. $217 and $185.
 D. $185 and $166.
Inventory)

Assume that Wilson uses the LIFO cost flow assumption to value its inventory and determine its cost
of goods sold. The amount that should be used to value the tripods is
 A. $51.00.
 B. $50.00.
 C. $53.00.
 D. $71.25.

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Inventory)
The operations of the firm may be viewed as a continual series of transactions or as a series of
separate ventures. The inventory valuation method that views the firm as a series of separate
ventures is
 A. First-in, first-out.
 B. Last-in, first-out.
 C. Specific identification.
 D. Weighted average.
Inventory)
Qty. Unit Units

4 100
6 200 $2.10
8 150
10 200 2.20
16 220
21 250 2.40
28 100
If Nasus uses perpetual LIFO inventory pricing, the value of the inventory on November 30 would be
 A. $468
 B. $523
 C. $552
 D. $460

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Inventory)
Tony's AutoParts Store is a small retailer. Tony Brown owns the business and has purchased a
microcomputer system equipped with bar coding devices. Tony Brown uses the first-in, first-out
(FIFO) method to value inventory and is concerned about the impact on inventory valuation of a
switch from a periodic inventory system to a perpetual inventory system. Which one of the following
statements is correct?
 A. Inventory will be valued higher under a perpetual inventory system.

 B. Inventory and cost of goods sold will be the same whether or not a perpetual or periodic inventory
system is used.
 C. The impact cannot be calculated.
 D. Inventory will be valued lower under a perpetual inventory system.
Inventory)
Thomas Engine Company is a wholesaler of marine engine parts. The activity of carburetor 2642J
during the month of March is presented below.
No. of Unit Sales

March Units Cost Price
1 Inventory 3,200 $64.30 $86.50
4 Purchase 3,400 64.75 87.00
14 Sales 3,600 87.25
25 Purchase 3,500 66.00 87.25
28 Sales 3,450 88.00
If Thomas uses a last-in, first-out periodic inventory system, the total cost of the inventory for
carburetor 2642J at March 31 is
 A. $196,115
 B. $201,300
 C. $268,400
 D. $197,488

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Inventory)
Days Probability
0-30 days $640,000 0.98
31-60 days 180,000 0.92
61-90 days 95,000 0.75
over 90 days 40,000 0.60
$955,000
If Brighton Corporation continues to determine its bad debt expense by using the historical
percentage of credit sales, the bad debt expense for the 20X3-X4 fiscal year would be:
 A. $86,275
 B. $70,350
 C. $82,875
 D. $66,950

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Inventory)
No. of Unit Sales

1 Inventory 3,200 $64.30 $86.50
4 Purchase 3,400 64.75 87.00
14 Sales 3,600 87.25
25 Purchase 3,500 66.00 87.25
28 Sales 3,450 88.00
If Thomas uses a moving-average perpetual inventory system and rounds all calculated average
costs to four decimal places, the total cost of the inventory for carburetor 2642J at March 31 is
 A. $265,960
 B. $199,233
 C. $198,301
 D. $194,200
Inventory)
Unit Total
1 Inventory 1,400 $2.45 $3,430
7 Purchase 1,800 2.75 4,950
16 Sales 2,000
20 Purchase 1,500 2.90 4,350
28 Sales 1,400
If Sawyer uses a last-in, first-out perpetual inventory system, the total cost of the inventory for Part
 A. $3,575
 B. $3,521
 C. $3,230
 D. $3,185
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98. Question ID: ICMA 1603.P1.075 (Topic: Cash & Cash Equiv., Accounts Receivable, and
Inventory)
Bell Retail Company sells antique replica trunks to customers all over the world. Bell’s inventory
records show the following.
Quantity Cost
(units) (each)
Beginning inventory 200 $1,055
Purchases:
June 3 170 1,062
September 18 190 1,070
December 10 160 1,076
Bell sells 470 units this year. Management is researching whether the company should use last in,
first out (LIFO) or first in, first out (FIFO). If Bell’s management wants to lower the company’s income
taxes, which inventory cost flow assumption should Bell select?
 A. FIFO, because the cost of goods sold will be $9,870 higher than LIFO.
 B. LIFO, because the cost of goods sold will be $5,250 higher than FIFO.
 C. FIFO, because the operating income will be $840 lower than LIFO.
 D. LIFO, because the operating income will be $4,360 lower than FIFO.
Inventory)

Assume that Wilson uses the FIFO cost flow assumption to value its inventory and determine its cost
of goods sold. The amount that should be used to value the lenses is
 A. $137.
 B. $108.
 C. $109.
 D. $110.

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Inventory)
Qty. Unit Units

4 100
6 200 $2.10
8 150
10 200 2.20
16 220
21 250 2.40
28 100
Nasus uses periodic LIFO inventory pricing. Nasus' cost of goods sold for November would be
 A. $992.
 B. $1,300.
 C. $1,292.
 D. $1,237.

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Inventory)
No. of Unit Sales

1 Inventory 3,200 $64.30 $86.50
4 Purchase 3,400 64.75 87.00
14 Sales 3,600 87.25
25 Purchase 3,500 66.00 87.25
28 Sales 3,450 88.00
If Thomas uses a first-in, first-out perpetual inventory system, the total cost of the inventory for
 A. $263,825
 B. $196,115
 C. $197,488
 D. $201,300
Inventory)
No. of Unit Sales

1 Inventory 3,200 $64.30 $86.50
4 Purchase 3,400 64.75 87.00
14 Sales 3,600 87.25
25 Purchase 3,500 66.00 87.25
28 Sales 3,450 88.00
If Thomas uses a last-in, first-out perpetual inventory system, the total cost of the inventory for
 A. $197,488
 B. $263,863
 C. $196,200

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 D. $268,400
Inventory)
An analysis of a company's $150,000 accounts receivable at year-end resulted in a credit ending
balance of $5,000 for its allowance for credit losses account and a credit loss expense of $2,000.
During the past year, recoveries on credit losses previously written off were correctly recorded at
$500. If the beginning balance in the allowance for credit losses account was a credit balance of
$4,700, what was the amount of accounts receivable written off as credit losses during the year?
 A. $1,800
 B. $2,200
 C. $1,200
 D. $2,800
Inventory)
A company has the following short-term investments:
 A money market mutual fund valued at $14,000.

 A 5-year bond with a face value of $10,000 that matures in 30 days that was purchased 2 years
ago. The market value is also $10,000.
 A 20-year bond with a face value and a market value of $15,000 that matures in 30 days that
was purchased 3 months ago.
 200 shares of common stock with a market value of $30,000.
 A $5,000 bank certificate of deposit that matures in 6 months and has a penalty for early
withdrawal.
How much should the company report as cash equivalents?
 A. $69,000
 B. $39,000
 C. $29,000
 D. $14,000

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Inventory)
Jensen Company uses a perpetual inventory system. The following purchases and sales were made
during the month of May:
May Activity Description

1 Balance 100 units at $10 per unit
9 Purchase 200 units at $10 per unit
16 Sale 190 units
29 Sale 120 units
If Jensen Company uses the first-in, first-out (FIFO) method of inventory valuation, the May 31
inventory would be
 A. $1,460
 B. $1,680
 C. $1,400
 D. $1,493
Inventory)
Unit Total
1 Inventory 1,400 $2.45 $3,430
7 Purchase 1,800 2.75 4,950
16 Sales 2,000
20 Purchase 1,500 2.90 4,350
28 Sales 1,400
If Sawyer uses a last-in, first-out periodic inventory system, the total cost of the inventory for Part
 A. $3,510
 B. $3,575
 C. $3,185
 D. $3,230

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Inventory)
Fidler Company has estimated its credit loss expense by using 1% of net sales. However, the
company is contemplating aging its accounts receivable and using this as a basis for estimating its
credit losses, as it is believed that this will provide a better estimate of the credit losses. The
following aging schedule was prepared as of November 30 of the current year, the end of the fiscal
year.
% estimated
Age of Account Amount credit losses
Under 60 days $730,000 1%
61-90 days 40,000 6%
91-120 days 18,000 9%
Over 120 days 72,000 25%
Net sales for the year were $4,200,000. There is a debit balance of $14,000 in the allowance for
credit losses account as of November 30 of the current year.
If Fidler estimates its credit losses by continuing to use the percentage of net sales, the balance in
the allowance for credit losses account after the adjusting entry is made at November 30 of the
current year will be
 A. $42,000
 B. $29,320
 C. $28,000
 D. $56,000

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Inventory)
Addison Hardware began the month of November with 150 large brass switchplates on hand at a
cost of $4.00 each. These switchplates sell for $7.00 each. The following schedule presents the
sales and purchases of this item during the month of November.
Quantity
November Received Unit Cost Units Sold
5 100
7 200 $4.20
9 150
11 200 $4.40
17 220
22 250 $4.80
29 100
If Addison uses perpetual LIFO inventory pricing, the value of the inventory at November 30 will be
 A. $1,046.
 B. $936.
 C. $1,078.
 D. $1,012.
Inventory)
A company has the following items that have not yet been recorded in its accounting system.
• A transfer from its checking account to the petty cash fund in the amount of $50.00.
• A post-dated check in the amount of $500 received from a customer, not negotiable for 6
weeks.
• A check for $1,000 that was previously deposited in the company's bank account but has
been deducted from the account and returned by the bank due to non-sufficient funds in
the payor's account.
• Checks received from customers in payment of accounts receivable totaling $2,500.
• Accounts payable checks mailed totaling $1,500.
After the transactions have been recorded, what amount of change in cash will have taken place?
 A. $0 (no change)
 B. $50 increase

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 C. $550 increase
 D. $1,000 increase
Inventory)
One of the conditions necessary to recognize a transfer of receivables with recourse as a sale is that
the
 A. The transferor is not both entitled and obligated to repurchase the receivables.
 B. Transferred assets are isolated from the transferee.
 C. Transferee surrenders control of the receivables but retains a beneficial interest.
 D. Transferor has derecognized all assets sold.
Inventory)
Devereaux Inc. uses a perpetual inventory system and had the following inventory inflows and
outflows during the month of November.
November Activity
10 Purchases 160 units at $20 per unit
18 Sales 180 units
27 Sales 100 units
If Devereaux Inc. uses the moving average cost method, the value of its inventory at November 30
would be
 A. $4,400
 B. $4,480
 C. $4,960
 D. $4,785

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Inventory)
November Activity
18 Sales 180 units
27 Sales 100 units
If Devereaux Inc. uses the first-in, first-out method, the value of its inventory at November 30 would
be
 A. $4,960
 B. $4,480
 C. $4,560
 D. $4,400
Inventory)
On December 31, Year 1, Johnson Corporation sold on account and shipped merchandise with a list
price of $75,000 to Gibsen Company. The terms of the sale were n/30, FOB shipping point. The
merchandise arrived at Gibsen on January 5, Year 2. Because of confusion about the shipping
terms, the sale was not recorded until January of Year 2 and the merchandise, sold at a markup of
25% of cost, was included in Johnson's inventory on December 31, Year 1. Johnson uses a periodic
inventory system. As a result of the above, Johnson's income before income taxes for the year
ended December 31, Year 1 was
 A. Understated by $15,000.
 B. Correctly stated.
 C. Understated by $75,000.
 D. Understated by $18,750.

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Inventory)
Sales $2,000,000
Bad debt expense 0
The entry to write off Norris Corporation's accounts receivable balance of $10,000 will
 A. Increase total assets and decrease net income.

 B. Have no effect on total assets and net income.
 C. Decrease total assets and net income.
 D. Have no effect on total assets and decrease net income.
Inventory)
An item of inventory purchased in year 1 for $25.00 has been incorrectly written down to a net
realizable value of $17.50 at the end of year 1. The item is currently selling in year 2 for $50.00, its
normal selling price. Which one of the following statements is correct?
 A. The cost of sales for year 2 will be overstated.

 B. The income for year 1 is overstated.
 C. The income for year 2 will be overstated.
 D. The closing inventory of year 1 is overstated.

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116. Question ID: CMA 1292 P2 Q8 H1 (Topic: Cash & Cash Equiv., Accounts Receivable, and
Inventory)
In accounting for inventories, generally accepted accounting principles require departure from the
historical cost principle when the utility of inventory has fallen below cost. When the inventory cost
flow assumption being used is anything other than LIFO or the Retail Method, the inventory should
be measured at
 A. Lower of cost or the original cost plus a normal profit margin.

 B. Lower of cost or the original cost minus an allowance for obsolescence.
 C. Lower of cost or market.
 D. Lower of cost or net realizable value.
Inventory)
Qty. Unit Units

Nov. Recd. Cost Sold
5 100
7 200 $4.20
9 150
11 200 $4.40
17 220
22 250 $4.80
29 100
If Addison uses periodic weighted-average inventory pricing, the gross profit for November will be
 A. $1,516
 B. $1,482
 C. $1,574
 D. $1,548

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Inventory)
Qty. Unit Units

Nov. Recd. Cost Sold
5 100
7 200 $4.20
9 150
11 200 $4.40
17 220
22 250 $4.80
29 100
If Addison uses FIFO inventory pricing, the value of the inventory on November 30 would be
 A. $1,046.
 B. $1,012.
 C. $1,104.
 D. $936.
Inventory)
Sleepy Time Baby Clothes maintains its corporate checking account at BUY Bank. Sleepy Time also
has a $50,000 line of credit at BUY Bank, for which Sleepy Time maintains a compensating balance
of $10,000 in its checking account. Sleepy Time had $45,000 outstanding on the line at December
31, 20X4. The requirement to keep a $10,000 compensating balance in its checking account was not
a part of the loan agreement that Sleepy Time signed for the line of credit. However, the company's
loan officer at BUY Bank monitors its checking account balance and if the balance falls below
$10,000, the loan officer calls Sleepy Time.
On December 31, 20X4, the balance in Sleepy Time's checking account was $12,000 according to
the company's general ledger. Sleepy Time's accounts receivable department had recorded several
customer payments received in the customers' accounts in the accounting system, but as of
December 31 had not yet deposited the checks at BUY Bank. The total of the checks received and
posted but not yet deposited was $2,000 at December 31, 20X4.
What cash balance should Sleepy Time report on its balance sheet for December 31, 20X4?
 A. $14,000
 B. $12,000

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 C. zero
 D. $47,000
Inventory)
A multinational company maintains its financial records under both IFRS and U.S. GAAP. Last year,
the company determined its inventory with a carrying amount of $500,000 was impaired because
demand for its product collapsed when a competitor launched a new product with innovative
features. As a result, the company wrote down its inventory to $0. This year, however, government
authorities unexpectedly announced that the competitor’s product was defective and the product was
removed from the market. As a result, the company’s products were again in demand and the
company estimated their net realizable value to be $750,000 at the end of the current quarter. How
should the company record this new development in the current quarter?
 A. Under IFRS, $750,000 write-up of the inventory; under U.S. GAAP, $750,000 write-up of the
inventory.
 B. Under IFRS, $500,000 write-up of the inventory; under U.S. GAAP, $0 write-up of the inventory.
 C. Under IFRS, 750,000 write-up of the inventory; under U.S. GAAP, $0 write-up of the inventory.
 D. Under IFRS, $0 write-up of the inventory; under U.S. GAAP, $0 write-up of the inventory.
121. Question ID: CMA 690 4.11 (Topic: Cash & Cash Equiv., Accounts Receivable, and
Inventory)
Rice, Inc. uses the allowance method to account for uncollectible accounts. An account receivable
that was previously determined uncollectible and written off was collected during May. The effect of
the collection on Rice's current ratio and total working capital is as follows:
 A. The current ratio will be unchanged, but working capital will increase.
 B. There is no impact on either of the ratios.
 C. Both ratios will decrease.
 D. Both ratios will increase.
Inventory)
During the year 1 year-end physical inventory count at Tequesta Corporation, $40,000 worth of
inventory was counted twice. Assuming that the year 2 year-end inventory was correct, the result of
the year 1 error was that
 A. Year 1 cost of goods sold was understated, and year 2 retained earnings was correct.
 B. Year 1 cost of goods sold was overstated, and year 2 income was understated.
 C. Year 1 retained earnings was understated, and year 2 ending inventory was correct.
 D. Year 1 income was overstated, and year 2 ending inventory was overstated.

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Inventory)
Sales $2,000,000
Bad debt expense 0
As a result of the November 30 adjusting entry to provide for bad debts, the allowance for doubtful
accounts will
 A. Decrease by $22,500.
 B. Increase by $25,500.
 C. Increase by $30,000.
 D. Increase by $22,500.
Inventory)
Jensen Company uses a perpetual inventory system. The following purchases and sales were made
during the month of May:
May Activity Description

16 Sale 190 units
29 Sale 120 units
If Jensen Company uses the perpetual last-in, first-out (LIFO) method of inventory valuation, the
May 31 inventory would be
 A. $1,562
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 B. $1,400
 C. $1,493
 D. $1,460
Inventory)
Fidler Company has estimated its credit loss expense by using 1% of net sales. However, the
company is contemplating aging its accounts receivable and using this as a basis for estimating its
credit losses, as it is believed that this will provide a better estimate of the credit losses. The
following aging schedule was prepared as of November 30 of the current year, the end of the fiscal
year.
% estimated
Age of Account Amount credit losses
Under 60 days $730,000 1%
61-90 days 40,000 6%
91-120 days 18,000 9%
Over 120 days 72,000 25%
Net sales for the year were $4,200,000. There is a debit balance of $14,000 in the allowance for
credit losses account as of November 30 of the current year.
If Fidler estimates its credit losses by aging the accounts receivable, the adjusting entry to the
allowance for credit losses made on November 30 of the current year will be for
 A. $29,320
 B. $43,320
 C. $15,320
 D. $56,000
Inventory)
On a company's December 31, 20X6 balance sheet, which of the following items should be included
in the amount reported as cash?
I. A check payable to the company, dated January 2, 20X7, in payment of a sale made in
December 20X6.
II. A check drawn on the company's account, payable to a vendor, dated and recorded in the
company's books on December 31, 20X6 but not mailed until January 10, 20X7.
 A. I only.
 B. Neither I nor II.
 C. II only.
 D. Both I and II.

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Inventory)
On the Statement of Financial Position, accounts receivable is valued at the
 A. Original cost when the asset was acquired.

 B. Estimated net realizable value.
 C. Current market value.
 D. Amount payable when due.
Inventory)
An internal auditor is deriving cash flow data based on an incomplete set of facts. Credit loss
expense during the period was $2,000. Additional data for this period follow:
Net credit sales $100,000

Accounts receivable beginning balance 5,000
Allowance for credit losses beginning balance (500)
Accounts receivable written off 1,000
Increase in net accounts receivable
30,000
(net of allowance for credit losses)
How much cash was collected from accounts receivable this period?
 A. $67,000
 B. $70,000
 C. $68,500
 D. $68,000
Inventory)
Tony's AutoParts Store is a small retailer. Tony Brown owns the business and has purchased a
microcomputer system equipped with bar coding devices. Tony Brown has asked Cheryl James,
accountant, what she thinks of implementing a perpetual inventory system. Which one of the
following statements is correct?
 A. A perpetual system is cheaper to administer than a periodic system.

 B. The cost of implementing and administering a perpetual system for Tony's AutoParts Store would
probably exceed any savings generated by achieving better control.
 C. A perpetual inventory system requires a daily reconciliation between goods sold per the cash
register and goods remaining in stock.
 D. A perpetual system might eliminate the necessity of having to take a physical inventory every year.

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Inventory)
Bad debt expense must be estimated to satisfy the matching principle when expenses are recorded
in the same periods as the related revenues. In estimating the provision for doubtful accounts for a
period, companies accrue
 A. A percentage of accounts receivable transactions for the period.

 B. A percentage of total sales.
 C. Either an amount based on a percentage of credit sales or an amount based on a percentage of
accounts receivable after adjusting for any balance in the allowance for doubtful accounts.
 D. Either an amount based on a percentage of total sales or an amount based on a percentage of
accounts receivable after adjusting for any balance in the allowance for doubtful accounts.
Inventory)
The following inventory valuation errors have been discovered for Knox Corporation.
 The year 1 year-end inventory was overstated by $23,000.

 The year 2 year-end inventory was understated by $61,000.
 The year 3 year-end inventory was understated by $17,000.
The reported income before taxes for Knox was
Year 1 - $138,000
Year 2 - $254,000
Year 3 - $168,000
Reported income before taxes for year 1, year 2, and year 3, respectively, should have been
 A. $115,000, $338,000, and $124,000

 B. $161,000, $338,000, and $90,000
 C. $161,000, $170,000, and $212,000
 D. $115,000, $338,000, and $212,000
Inventory)
All sales and purchases for the year at Ross Corporation are credit transactions. Ross uses a
perpetual inventory system and shipped goods that were correctly excluded from ending inventory.
However, in error, the sale was not recorded. Which one of the following statements is correct?
 A. Accounts receivable was understated, inventory was not affected, sales were understated, and cost
of goods sold was not affected.
 B. Accounts receivable was understated, inventory was overstated, sales were understated, and cost
of goods sold was overstated.
 C. Accounts receivable was understated, inventory was not affected, sales were understated, and cost
 D. Accounts receivable was not affected, inventory was not affected, sales were understated, and cost
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Inventory)
A company uses the IFRS lower-of-cost-or-net realizable value rule to value its inventory of frozen
foods. The company applies this method on a total inventory basis, not directly to each item of
frozen food. Information on the frozen food inventory at December 31 of the year just ended is
provided below.
Replacement cost $ 80,000

Net realizable value less profit margin 85,000
Weighted average cost 90,000
Net realizable value 100,000
Using this approach, the company should value its inventory at
 A. $100,000.
 B. $85,000.
 C. $90,000.
 D. $80,000.
Inventory)
Quantity
November Received Unit Price Units Sold
4 100
6 200 $2.10
8 150
10 200 2.20
16 220
21 250 2.40
28 100
If Nasus uses perpetual moving average inventory pricing, the sale of 220 items on November 16
would be recorded at a unit cost of:
 A. $2.20
 B. $2.16
 C. $2.08

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 D. $2.10
Inventory)
No. of Unit Sales

1 Inventory 3,200 $64.30 $86.50
4 Purchase 3,400 64.75 87.00
14 Sales 3,600 87.25
25 Purchase 3,500 66.00 87.25
28 Sales 3,450 88.00
If Thomas uses a weighted-average periodic inventory system, the total cost of the inventory for
 A. $198,301
 B. $199,233
 C. $194,200
 D. $198,372
136. Question ID: HOCK MP2 AF4 (Topic: Cash & Cash Equiv., Accounts Receivable, and
Inventory)
According to the FASB conceptual framework, which of the following attributes would not be used to
measure inventory?
 A. Historical cost
 B. Net realizable value
 C. Present value of future cash flows
 D. Replacement cost

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Inventory)
November Activity
18 Sales 180 units
27 Sales 100 units
If Devereaux Inc. uses the last-in, first-out method, the value of its inventory at November 30 would
be
 A. $4,560
 B. $4,400
 C. $4,480
 D. $4,785
Inventory)
Quantity
November Received Unit Cost Units Sold
5 100
7 200 $4.20
9 150
11 200 $4.40
17 220
22 250 $4.80
29 100
If Addison uses periodic LIFO inventory pricing, the cost of goods sold for November will be
 A. $2,474.
 B. $2,584.
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 C. $2,442.
 D. $2,416.
Investments, PP&E (Fixed Assets), and Intangible and Other Assets

139. Question ID: CMA Sample Question (Topic: Investments, PP&E (Fixed Assets), and
Intangible and Other Assets)
Pearl Corporation acquired manufacturing machinery on January 1 for $9,000. During the year, the
machine produced 1,000 units, of which 600 were sold. There was no work-in-process inventory at
the beginning or at the end of the year. Installation charges of $300 and delivery charges of $200
were also incurred. The machine is expected to have a useful life of five years with an estimated
salvage value of $1,500. Pearl uses the straight-line depreciation method. The original cost of the
machinery to be recorded in Pearl's books is
 A. $9,000
 B. $9,300
 C. $9,200
 D. $9,500
140. Question ID: CMA 1292 P2 Q5 (Topic: Investments, PP&E (Fixed Assets), and Intangible
and Other Assets)
Aston Company acquired a new machine at a cost of $200,000 and incurred costs of $2,000 to have
the machine shipped to its factory. Aston also paid $4,500 to construct and prepare a site for the
new machine and $3,500 to install the necessary electrical connections. Aston estimates that the
useful life of this new machine will be 5 years and that it will have a salvage value of $15,000 at the
end of that period. Assuming that Aston acquired the machine on January 1 and will take a full year's
depreciation in the first year of ownership, the proper amount of depreciation expense to be
recorded by Aston for the first year if it uses the double-declining-balance method is
 A. $84,000
 B. $78,000
 C. $80,800
 D. $74,000

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141. Question ID: CMA 1292 P2 Q7 H1 (Topic: Investments, PP&E (Fixed Assets), and
Since Year 1, Ames Steel Company has replaced all of its major manufacturing equipment and now
has the following equipment recorded in the appropriate accounts. Ames uses a calendar year as its
fiscal year.
 A forge purchased January 1, Year 1 for $100,000. Installation costs were $20,000, and the
forge has an estimated 5-year life with a salvage value of $10,000.
 A grinding machine costing $45,000 purchased January 1, Year 2. The machine has an
estimated 5-year life with a salvage value of $5,000.
 A lathe purchased January 1, Year 4 for $60,000. The lathe has an estimated 5-year life with a
salvage value of $7,000.
Using the double-declining-balance method, Ames' Year 4 depreciation expense is
 A. $45,000
 B. $40,334
 C. $40,848
 D. $36,464
and Other Assets)
WD Mining Company purchased a section of land for $600,000 in 20X0 to develop a zinc mine. The
mine began operating in 20X1. At that time, management estimated that the mine would produce
200,000 tons of quality ore. A total of 100,000 tons of ore was mined and processed from 20X1
through December 31, 20X8. During January 20X9, a very promising vein was discovered. The
revised estimate of ore still to be mined was 250,000 tons. Estimated salvage value for the mine
land was $100,000 in both 20X1 and 20X9.
Assuming that 10,000 tons of ore was mined in 20X9, the computation WD Mining company should
use to determine the amount of depletion to record in 20X9 would be
 A. [($600,000 - $100,000 - $250,000) / 350,000] x 10,000 tons

 B. [($600,000 - $100,000) / 350,000 tons] x 10,000 tons
 C. [($600,000 - $100,000 - $250,000) / 250,000 tons] x 10,000 tons
 D. [($600,000 - $100,000) / 450,000 tons] x 10,000 tons
and Other Assets)
Jason Company's fiscal year ended on November 30 of the current year. Jason has an irrevocable
contract to replace its mainframe computer system on December 15 of the current year, at a net cost
of $750,000, reflecting the trade-in of the old hardware for $10,000, the fair value. The net book
value of the old hardware on November 30 of the current year is $27,000. On its November 30
Statement of Financial Position for the current year, Jason should report the value of the old
computer equipment as
 A. $10,000
 B. $27,000

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 C. $750,000
 D. $760,000
144. Question ID: CMA 0687 3.11 (Topic: Investments, PP&E (Fixed Assets), and Intangible
and Other Assets)
On January 1, Boggs, Inc. paid $700,000 for 100,000 shares of Mattly Corporation representing 30%
of Mattly's outstanding common stock. The following computation was made by Boggs.
Purchase price: $700,000
30% equity in book value of Mattly's net assets: $500,000
Excess cost over book value: $200,000
The excess cost over book value was attributed to goodwill. Mattly reported net income for the year
ended December 31 of $300,000. Mattly Corporation had paid cash dividends of $100,000 on July 1.
If Boggs, Inc. exercised significant influence over Mattly Corporation and properly accounted for the
long-term investment under the equity method, the amount of net investment revenue Boggs should
report from its investment in Mattly would be:
 A. $60,000
 B. $30,000
 C. $80,000
 D. $90,000
145. Question ID: CIA 594 P4 Q21 (Topic: Investments, PP&E (Fixed Assets), and Intangible
and Other Assets)
The correct form of the journal entry recorded upon the sale of a plant asset sold for an amount of
cash in excess of its net book value is as follows:
 A. Dr Cash; Dr Accumulated depreciation - machinery; Dr Gain on disposal of machinery; Cr Machinery

 B. Dr Cash; Dr Machinery; Cr Accumulated depreciation - machinery; Cr Gain on disposal of machinery
 C. No journal entry is required.
 D. Dr Cash; Dr Accumulated depreciation; Cr Machinery; Cr Gain on disposal of machinery
and Other Assets)
When Pyne Co. decided to go into the business of delivering pizzas at lunch time to a nearby office
complex, the company acquired a delivery truck at the cost of $20,000. The truck had an estimated
useful life of 5 years and a $2,000 salvage value. The company also acquired a used car for
deliveries at a cost of $4,800, with an estimated useful life of 3 years and a $600 salvage value.
The depreciation on Pyne's used delivery car for year three using the sum-of-the-years'-digits (SYD)
method would be
 A. $800
 B. $700
 C. $1,600
 D. $1,400

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147. Question ID: HOCK ICD.002 (Topic: Investments, PP&E (Fixed Assets), and Intangible
and Other Assets)
International Industries, Inc. purchased a laser additive manufacturing (LAM) 3-D production
machine for £900,000. The machine was expected to have a life of 10 years, but the expected life of
the laser component of the equipment was only 5 years. The cost allocated to the laser component
was £220,000, with a residual value of £10,000. The cost allocated to the main part of the machine
was £680,000 with a residual value of £20,000. Both the laser and the main part of the LAM machine
are being depreciated using straight line depreciation.
At the end of 5 years, International Industries replaced the laser at a cost of £250,000. No residual
value was assigned to the replacement laser. The original laser was sold for £2,000.
International Industries uses IFRS for its financial reporting.
After the original laser was sold and the replacement laser installed, what was the revised carrying
amount of the LAM machine, including the laser?
 A. £600,000.
 B. £715,000.
 C. £610,000.
 D. £590,000.
and Other Assets)
Nella Corporation computes depreciation to the nearest whole month. A new piece of equipment
was placed in operation on July 1, 20X1. It was expected to produce 400,000 units of product during
its estimated useful life of eight years. Total cost was $300,000; salvage value was estimated to be
$30,000. Nella employs a calendar year for financial reporting purposes. Actual production for the
period of July 1 through December 31, 20X1 was 34,000 units.
If Nella had used the units-of-production method of depreciation, the amount of depreciation
computed for this equipment for book purposes in 20X1 would have been
 A. $11,475
 B. $25,500
 C. $12,750
 D. $22,950
and Other Assets)
Maple Industries purchased a lathe on June 1, Year 1, the beginning of the fiscal year. The lathe
cost $43,200 and has an estimated salvage value of $3,600 and an estimated useful life of 8 years.
The lathe has been used throughout the year.
Assuming that Maple Industries recognizes one-half year's depreciation on all assets purchased or
sold during the year, the amount of straight-line depreciation that would be taken for financial
reporting purposes in the fiscal year ending May 31, Year 2 would be
 A. $2,700
 B. $2,475

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 C. $5,400
 D. $4,950
and Other Assets)
Most plant assets have a limited useful physical life. All of the following factors limit the useful life of
a plant asset except
 A. Obsolescence.
 B. Tax regulations.
 C. Deterioration and decay.
 D. Wear and tear.
151. Question ID: ICMA 13.P2.016 (Topic: Investments, PP&E (Fixed Assets), and Intangible
and Other Assets)
Blake Ltd. has determined that an impairment exists on one of its machines, but the company
expects to continue using the asset for another three full years as no active market exists for the
machine. Selected information on the impaired asset (on the date that impairment was determined to
exist) is provided below.
Original cost of machine £22,000

Book (carrying) value of the machine 20,000
Value in use (present value of future cash flows) 15,000
Net selling price (fair value if sold less costs to sell) 12,000
According to IFRS, what is the amount of the impairment loss to be recorded by Blake?
 A. £3,000.
 B. £8,000.
 C. £7,000.
 D. £5,000.
and Other Assets)
Sanns, Inc. always charges prepaid insurance when it purchases or renews insurance policies. It
adjusts the accounts for insurance used once per year, as of December 31. Thus, the 3-year
renewal premium for a policy that expired on July 31 of the current year was charged to prepaid
insurance. The 3-year renewal policy cost $63,000, up $27,000 from the $36,000 it had cost 3 years
earlier. The adjusting entry necessary to reflect the insurance accounts at December 31 of the
current year, Sanns' fiscal year-end, would be to
 A. Debit insurance expense for $54,250 and credit prepaid insurance for $54,250.
 B. Debit prepaid insurance for $15,750 and credit insurance expense for $15,750.
 C. Debit insurance expense for $15,750 and credit prepaid insurance for $15,750.
 D. Debit prepaid insurance for $8,750 and credit insurance expense for $8,750.

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153. Question ID: CMA 688 4.24 (Topic: Investments, PP&E (Fixed Assets), and Intangible and
Other Assets)
In the process of preparing consolidated financial statements, which one of the following items
does not need to be eliminated?
 A. Profit in beginning inventory acquired from a parent.

 B. Profit on sale of a fixed asset to a subsidiary.
 C. Profit on inventory sold to a nonaffiliate.
 D. Dividends receivable from a subsidiary.
Other Assets)
In a business combination, the identifiable assets of the acquired company and the liabilities
assumed are to be recorded on the books of the acquiring company at
 A. Book values.
 B. Fair values.
 C. Original cost minus accumulated depreciation.
 D. Replacement cost.
and Other Assets)
On January 1, Boggs, Inc. paid $700,000 for 100,000 shares of Mattly Corporation representing 30%
of Mattly's outstanding common stock. The following computation was made by Boggs.
Purchase price: $700,000
30% equity in book value of Mattly's net assets: $500,000
Excess cost over book value: $200,000
The excess cost over book value was attributed to goodwill. Mattly reported net income for the year
ended December 31 of $300,000. Mattly Corporation had paid cash dividends of $100,000 on July 1.
If Boggs, Inc. did not exercise significant influence over Mattly Corporation and properly accounted
for the long-term investment under the fair value method, the amount of net investment revenue
Boggs should report from its investment in Mattly would be
 A. $90,000
 B. $20,000
 C. $60,000
 D. $30,000

Hock 2020 Part 1
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and Other Assets)
Assuming that Maple Industries calculates depreciation to the nearest whole month on all assets
purchased or sold during the year, the amount of double-declining-balance (DDB) depreciation that
would be taken for financial reporting purposes in the fiscal year ending May 31, Year 3 in the
second year of the asset's life would be
 A. $8,100
 B. $10,800
 C. $9,900
 D. $7,425
and Other Assets)
Panco, Inc. owns 90% of the voting stock of Spany Corporation. After consolidated financial
statements have been prepared, the entries to eliminate intercompany payables and receivables will
 A. Be reflected only in the accounts of Panco.

 B. Be reflected only in the accounts of Spany.
 C. Be reflected in the accounts of both Panco and Spany.
 D. Not be reflected in the accounts of either company.
and Other Assets)
The value of property, plant, and equipment that is included in total assets on the statement of
financial position is
 A. Acquisition cost.
 B. Appraisal or market value.
 C. Cost minus accumulated depreciation.
 D. Replacement cost.
Other Assets)
When preparing consolidated financial statements, the entity being accounted for is the
 A. Legal entity.
 B. Noncontrolling interest.
 C. Economic entity.
 D. Parent.

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and Other Assets)
The factors primarily relied upon to determine the economic life of an asset are
 A. Tax regulations and SEC (Security Exchange Commission) guidelines.

 B. Passage of time, asset usage, and obsolescence.
 C. SEC (Security Exchange Commission) guidelines and asset usage.
 D. Tax regulations and asset usage.
and Other Assets)
Depreciation of plant assets refers to
 A. Asset valuation for statement of financial position purposes.

 B. Allocating the cost of the asset to the periods of use.
 C. Accounting for costs to reflect the change in general price levels.
 D. Accumulating a fund for the replacement of the asset.
and Other Assets)
Costs that are capitalized with regard to a patent include
 A. Incidental costs of obtaining the patent, costs of successful and unsuccessful patent infringement
suits, and the value of any signed patent licensing agreement.
 B. Legal fees of obtaining the patent, incidental costs of obtaining the patent, and research and
development costs incurred on the invention that is patented.
 C. Legal fees of obtaining the patent, incidental costs of obtaining the patent, and costs of successful
patent infringement suits.
 D. Legal fees of obtaining the patent, costs of successful patent infringement suits, and research and
development costs incurred on the invention that is patented.
and Other Assets)
Under which of the following depreciation methods is it possible for depreciation expense to be
higher in the later years of an asset's useful life?
 A. Activity method based on units of production.

 B. Straight line.
 C. Weighted average.
 D. Sum of the years' digits.

Hock 2020 Part 1
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and Other Assets)
Nichols Corporation renewed an insurance policy for three years beginning September 1, Year 1,
and recorded the $81,000 premium in the Prepaid Insurance account. The $81,000 premium
represents an increase of $23,400 from the $57,600 premium charged three years ago. Assuming
Nichols only records its insurance adjustments at the end of the calendar year, the adjusting entry
required to reflect the proper balances in the insurance accounts at December 31, Year 1, Nichols'
year end, would be to
 A. Debit Insurance Expense for $21,800 and credit Prepaid Insurance for $21,800.
 B. Debit Insurance Expense for $72,000 and credit Prepaid Insurance for $72,000.
 C. Debit Prepaid Insurance for $9,000 and credit Insurance Expense for $9,000.
 D. Debit Insurance Expense for $9,000 and credit Prepaid Insurance for $9,000.
and Other Assets)
fiscal year.
Using the straight-line depreciation method, Ames' Year 4 depreciation expense is
 A. $40,848
 B. $45,000
 C. $36,464
 D. $40,600
and Other Assets)
A steel press machine is purchased for $50,000 cash and a $100,000 interest bearing note payable.
The cost to be recorded as an asset (in addition to the $150,000 purchase price) should include all
of the following except
 A. Interest on the note payable.

 B. Freight and handling charges.
 C. Assembly and installation costs.
 D. Insurance while in transit.

Hock 2020 Part 1
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and Other Assets)
A newly acquired plant asset is to be depreciated over its useful life. The best rationale for this
process is the
 A. Monetary unit assumption.

 B. Materiality assumption.
 C. Revenue recognition assumption.
 D. Matching assumption.
168. Question ID: HOCK MP2 AF18 (Topic: Investments, PP&E (Fixed Assets), and Intangible
and Other Assets)
An employee of M, a public company, developed a new product that has just been patented. The
development costs of this product were negligible, but the patent rights are almost certainly worth
many millions of dollars. Which accounting concept would prevent the company from recognizing the
value of this patent as a non-current asset in its balance sheet?
 A. Going concern
 B. Historical cost
 C. Conservatism
 D. Materiality
and Other Assets)
Lambert Company acquired a machine on October 1 that was placed in service on November 30.
The cost of the machine was $63,000, of which $20,000 was given as a down payment. The
remainder was borrowed at 12% annual interest. Additional costs included $2,500 for shipping,
$4,000 for installation, $3,000 for testing, and $1,290 of interest on the borrowed funds. How much
should be reported for this acquisition in the machine account on Lambert Company's statement of
financial position as of November 30?
 A. $69,500
 B. $73,790
 C. $63,000
 D. $72,500
and Other Assets)
Which one of the following statements is correct about the reconciliation of U.S. GAAP and
International Financial Reporting Standards (IFRS)?
 A. All costs of research and development must be expensed under both U.S. GAAP and IFRS.
 B. The costs of development must be expensed under U.S. GAAP but are capitalized under IFRS if
they meet specific criteria.
 C. The costs of research must be expensed under U.S. GAAP but are capitalized under IFRS if they
meet specific criteria.

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 D. Internally generated goodwill may not be capitalized under U.S. GAAP, but it may be capitalized
under IFRS.
and Other Assets)
A decline in the fair value below amortized cost of an available-for-sale investment in a debt security
that the company does not intend to sell before a possible recovery of its amortized cost basis and
that is deemed to be other than temporary should
 A. be accumulated in a valuation allowance resulting from the passage of time.

 B. be treated as an unrealized loss and included in the equity section of the balance sheet as a
separate item.
 C. be evaluated for potential separation of the loss into the amount representing a credit loss, which is
recognized in net income, and the amount due to other factors, which is recognized in equity.
 D. not be realized until the security is sold.
and Other Assets)
What is the future annual depreciation charge on the LAM machine, including the laser, after the
replacement of the laser?
 A. £114,000.
 B. £115,000.
 C. £118,000.
 D. £116,000.

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173. Question ID: CIA 1190 IV.32 (Topic: Investments, PP&E (Fixed Assets), and Intangible
and Other Assets)
MKT Corporation's assets on December 31, Year 1, include the following:
I. U.S. Treasury Bills, acquired on October 15, Year 1, which mature on April 15, Year 2. MKT plans
to hold the Treasury Bills until they mature because the company has no need for the cash earlier
than the maturity date.
II. Shares of PF Company. PF has been very profitable and MKT Corporation plans to increase its
ownership in PF as it believes PF has strong growth potential.
III. Bonds of ABC Corporation that mature in 3 years. These bonds will be sold, as needed, to meet
MKT's current financing needs.
Which of the above should be classified as available-for-sale securities?
 A. III only.
 B. I, II, and III.
 C. I and II only.
 D. II and III only.
Other Assets)
An investment in available-for-sale debt securities is valued on the Statement of Financial Position at
the
 A. Par value of the debt securities.

 B. Fair value.
 C. Cost to acquire the security.
 D. Amortized cost.
and Other Assets)
Assuming that Maple Industries recognizes a full year's depreciation on all assets purchased during
the year but no depreciation on assets retired during the year, the amount of sum-of-the-years'-digits
(SYD) depreciation that would be taken for financial reporting purposes in the fiscal year ending May
31, Year 2 would be
 A. $1,100
 B. $8,800
 C. $9,600
 D. $10,800

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and Other Assets)
What was the gain or loss on the disposal of the original laser?
 A. £108,000 loss.
 B. £8,000 loss.
 C. £2,000 gain.
 D. £113,000 loss.
and Other Assets)
According to ASC 730-10-25-2, Research and Development-Elements of Costs to Be Identified with
Research and Development Activities, expenditures for equipment for research and development
 A. must be expensed in the period incurred, unless the costs are for testing a prototype.
 B. must be capitalized in the period incurred and amortized over the estimated life of the asset.
 C. must be expensed in the period incurred, unless the equipment has alternative uses in other R&D
projects or otherwise.
 D. may be expensed in the period incurred or capitalized if the probability of future benefits can readily
be determined.
and Other Assets)
On September 1, 20X3, for $4,000,000 cash and $2,000,000 notes payable, Norbend Corporation
acquired the net assets of Crisholm Company, which had a fair value of $5,496,000 on that
date. During the December 31, 20X5 year-end audit after all adjusting entries have been made, the
goodwill is determined to be worthless. The amount of the write-off as of December 31, 20X5 should
be
 A. $474,600
 B. $478,800
 C. $466,200
 D. $504,000

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and Other Assets)
Which of the following is not a correct statement regarding the historical cost of fixed assets?
 A. Proceeds obtained in the process of readying land for its intended purpose, such as from the sale of
cleared timber, should be recognized immediately in income.
 B. Special assessments imposed by a local government for sewage and drainage systems are
recorded by the owner of the land in the land account.
 C. The costs of improvements to equipment incurred after its acquisition should be added to the asset's
cost if they provide future service potential.
 D. The purchase price, freight costs, and installation costs of a productive asset should be included in
the asset's cost.
and Other Assets)
A company has just purchased a machine for $100,000 that has a five-year estimated useful life and
a zero estimated salvage value. It is expected to be used to produce 250,000 units of output, and
75,000 of those units are expected to be produced in the first year. Which of the following
depreciation methods will result in the greatest amount of depreciation expense for this machine in
its first year?
 A. Activity method based on units of production.

 B. Sum of the years' digits.
 C. Double declining balance method.
 D. Straight line.
and Other Assets)
Pie Baker, Ltd. purchased a secret fruit pie recipe for $75,000. An additional $10,000 was spent in
securing the secret recipe and safeguarding its contents. Pie Baker expects to keep the recipe a
secret indefinitely. Because of taste changes, the industry has found that recipes have been used for
an average of 8 years. Based on this information, Pie Baker should
 A. Capitalize the $85,000 cost and amortize it over 8 years.

 B. Expense the $85,000 cost because the secret formula cost should not be capitalized.
 C. Capitalize the $85,000 cost and then amortize it over the period the recipe is to remain a secret.
 D. Capitalize the $85,000 cost and then amortize it over 40 years.
Other Assets)
An investment in trading securities is valued on the Statement of Financial Position at the
 A. Lower of cost or market.

 B. Cost to acquire the asset.
 C. Accumulated income minus accumulated dividends since acquisition.
 D. Fair value.
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183. Question ID: CIA 591 IV.34 (Topic: Investments, PP&E (Fixed Assets), and Intangible and
Other Assets)
When the equity method is used to account for an investment in an associate, the recording of the
receipt of a cash distribution from the investee will result in
 A. The recognition of investment income.

 B. An increase in a liability account.
 C. An increase in a special equity account.
 D. A reduction in the investment balance.
and Other Assets)
Alton Corporation purchased 100% of the shares of Jones Corporation for $600,000. Financial
information for Jones Corporation is provided below.
The amount of goodwill resulting from this purchase, if any, would be
Jones Corporation
($000)
Book Fair
Value Value
Cash $ 50 $ 50
Accounts receivable 100 100
Inventory 150 100
Total current assets $300 $250
Property, plant & equipment (net) 500 600
Total assets $800 $850
Current liabilities $150 $150

Long-term debt 200 200
Total liabilities $350 $350
Common stock $150 $150

Paid-in capital 80 80
Retained earnings 220

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Total shareholders' equity $450
Total liabilities & shareholders' equity $800
The amount of goodwill resulting from this purchase, if any, would be
 A. $150,000.
 B. Zero.
 C. $200,000.
 D. $100,000.
185. Question ID: ICMA 1603.P1.023 ADAPTED (Topic: Investments, PP&E (Fixed Assets), and
How does IFRS differ from U.S. GAAP with respect to accounting for development costs?
 A. U.S. GAAP requires expensing of all development costs and IFRS requires capitalizing all
development costs.
 B. U.S. GAAP treats development costs as part of goodwill, whereas IFRS treats these costs as an
intangible asset.
 C. U.S. GAAP does not allow capitalization of development costs unless they are for materials,
equipment, or facilities that have alternative future uses. IFRS allows capitalization of development
costs but only if technical feasibility has been established.
 D. U.S. GAAP requires capitalization of development costs, whereas IFRS makes capitalization of
these costs optional.
and Other Assets)
An organization purchased a computer on January 1 of the current year for $108,000. It was
estimated to have a 4-year useful life and a residual (salvage) value of $18,000. The double-
declining-balance method is to be used. The amount of depreciation to be reported for the current
year is:
 A. ($108,000) x (25% x 1/2)

 B. ($108,000) x (25% x 2)
 C. ($108,000 - $18,000) x (25% x 2)
 D. ($108,000 - $18,000) x (25% x 1/2)
and Other Assets)
All of the following are specifically identifiable intangible assets except
 A. Goodwill.
 B. Copyrights.
 C. Leaseholds.
 D. Patents and trademarks.

Hock 2020 Part 1
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and Other Assets)
The following information is available for Paragon as of November 30, 20X5.
Property, plant and equipment
Land $27,500
Building $36,000
Accumulated depreciation (13,500)
Paragon's building is being depreciated using the straight-line method. The building has a 20-year
estimated useful life and an estimated salvage value of $6,000. The number of years the building
has been depreciated by Paragon as of November 30, 20X5 is
 A. 7.5 years.
 B. 15.0 years.
 C. 9.0 years.
 D. 12.5 years.
189. Question ID: CMA 1292 P2 Q8 H2 (Topic: Investments, PP&E (Fixed Assets), and
fiscal year.
Using the sum-of-the-years'-digits method, Ames' Year 4 depreciation expense (rounded to the
nearest dollar) is
 A. $36,464
 B. $40,334
 C. $40,600
 D. $40,848
Other Assets)
When a fixed plant asset with a 5-year estimated useful life is sold during the second year, how
would the use of an accelerated depreciation method instead of the straight-line method affect the
gain or loss on the sale of the fixed plant asset?
 A. A gain would increase, and a loss would decrease.

 B. A gain would decrease, and a loss would increase.

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 C. A gain would decrease, and a loss would decrease.
 D. A gain would increase, and a loss would increase.
and Other Assets)
A company should apply the equity method of accounting for an investment whenever it can
exercise significant influence over the investee. Usually, the minimum level of ownership at which an
investor can exercise significant influence is
 A. 10% ownership.
 B. 25% ownership.
 C. 50% ownership.
 D. 20% ownership.
and Other Assets)
What was the carrying value of the LAM machine, including the laser, just before the replacement
of the laser?
 A. £450,000.
 B. £465,000.
 C. £340,000.
 D. £360,000.
and Other Assets)
When Pyne Co. decided to go into the business of delivering pizzas at lunch time to a nearby office
complex, the company acquired a delivery truck at the cost of $20,000. The truck had an estimated
useful life of 5 years and a $2,000 salvage value. The company also acquired a used car for
deliveries at a cost of $4,800, with an estimated useful life of 3 years and a $600 salvage value.
The depreciation on Pyne's delivery truck for year two using the double-declining-balance (DDB)
method would be
 A. $6,000
 B. $7,200
 C. $4,320

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 D. $4,800
and Other Assets)
Prepaid expenses are valued on the Statement of Financial Position at the
 A. Cost less expired or used portion.

 B. Face amount collectible at maturity.
 C. Cost to acquire the asset.
 D. Cost to acquire minus accumulated amortization.
and Other Assets)
Nella Corporation computes depreciation to the nearest whole month. A new piece of equipment
was placed in operation on July 1, 20X1. It was expected to produce 400,000 units of product in its
estimated useful life of eight years. Total cost was $300,000; salvage value was estimated to be
$30,000. Nella employs a calendar year for financial reporting purposes. Actual production for the
past 3 years was as follows.
Year 1 - 34,000 units
If Nella uses the sum-of-the-years'-digits method of depreciation, the amount of depreciation
computed for this equipment for book purposes in 20X3 would be
 A. $52,500
 B. $48,750
 C. $45,000
 D. $18,750

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Liabilities and Taxes
196. Question ID: ICMA 19.P1.013 (Topic: Liabilities and Taxes)
A company has $100 million of debt that is due in March Year 3. In December Year 2, the company
entered into a non-cancelable agreement with its lender to refinance the debt with the same interest
rate, and the full principal is due in December Year 5. How should the debt be classified on the
December Year 2 balance sheet of the company?
 A. Classified as a contingent liability.

 B. Classified as a current liability.
 C. Classified as a long-term liability.
 D. Considered as an off-balance sheet liability.
197. Question ID: CMA 0697 P2 Q22 (Topic: Liabilities and Taxes)
Paxton Company started offering a 3-year assurance-type warranty on its products sold after June 1,
20X0. Paxton's actual sales for the year ended May 31, 20X1 were $2,695,000. The total cost of the
warranty is expected to be 3% of sales. The actual 20X1 warranty expenditures were $31,500 in
labor and $9,100 in parts. The amount of warranty expense that should appear on Paxton's income
statement for the year ended May 31, 20X1 is:
 A. $40,600
 B. $80,850
 C. $40,250
 D. $31,500
198. Question ID: CIA 0596 FARE Q21 (Topic: Liabilities and Taxes)
The selling price of a new company's units is $10,000 each. The buyers are provided with a 2-year
assurance-type warranty that is expected to cost the company $250 per unit in the year of the sale
and $750 per unit in the year following the sale. The company sold 80 units in the first year of
operation and 100 units in the second year. Actual payments for warranty claims were $10,000 and
$65,000 in years one and two, respectively. The amount charged to assurance-type warranty
expense during the second year of operation is:
 A. $100,000
 B. $25,000
 C. $85,000
 D. $65,000
Beginning January 1, Year 1, Center Company offered a 3-year assurance-type warranty from date
of sale on any of its products sold after January 1, Year 1. The warranty offer was part of a program
to increase sales. Meeting the terms of the warranty was expected to cost Center 4% of sales. Sales
made under warranty in Year 1 totaled $9,000,000, and one-fifth of the units sold were returned.
These units were repaired or replaced at a cost of $65,000. The amount of assurance-type warranty
expense that should appear on Center's Year 1 income statement is
 A. $72,000
 B. $65,000

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 C. $360,000
 D. $137,000
In Year 1, the Voorhees Corporation introduced a new line of computer products that carry a 2-year
assurance-type warranty against defects in workmanship. The company estimates that the total
warranty cost will be 10% of sales, with 40% of the expenditures occurring during the first year and
60% during the second year. Sales and actual warranty expenditures for Year 1 and Year 2 were as
follows:
Actual Warranty
Year Sales Expenditures
1 $300,000 $12,000
2 400,000 30,000
At the end of Year 2, the balance in the assurance-type warranty liability account will be:
 A. $58,000
 B. $46,000
 C. $28,000
 D. $24,000

Bearings Manufacturing Company Inc. purchased a new machine on January 1, 20X0 for $100,000.
The company uses the straight-line depreciation method with an estimated equipment life of 5 years
and a zero salvage value for financial statement purposes, and uses the 3-year Modified
Accelerated Cost Recovery System (MACRS) and the half-year convention with an estimated
equipment life of 3 years for income tax reporting purposes. Bearings is subject to a 35% marginal
income tax rate. Assume that the deferred tax liability at the beginning of the year is zero and that
Bearings has a positive earnings tax position. The MACRS depreciation rates for 3-year equipment
are shown below.
Year Rate
1 33.33%
2 44.45%
3 14.81%
4 7.41%
What is the deferred tax liability at December 31, 20X0 (rounded to the nearest whole dollar)?
 A. $11,666
 B. $33,330
 C. $4,666
 D. $7,000

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This data pertains to Lally Corporation for 20X4 and 20X5.
20X5 20X4
Income before income taxes $5,000,000 $4,000,000
Interest income included above that
100,000 100,000
was not subject to income taxes
 Income before income taxes in 20X4 included rent revenue of $80,000 that was not subject to
income tax until its receipt in 20X5.
 Lally was subject to an effective income tax rate of 40% in 20X4 and 20X5.
The deferred tax asset or liability reported on Lally Corporation's statement of financial position on
December 31, 20X5 is
 A. $8,000.
 B. $0.
 C. $40,000.
 D. $32,000.

Which one of the following temporary differences will result in a deferred tax asset?
 A. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on
a cash basis for tax purposes.
 B. Revenue and gross profit on a long-term contract reported over time on the financial statements as
the company makes progress toward satisfying its performance obligations but not reported on the tax
return until the contract's performance obligations have been completely satisfied.
 C. Investment gains on a privately-held equity investment accounted for under the equity method for
financial statement purposes and under the cost less impairment method for income tax purposes.
 D. Use of the straight-line depreciation method for financial statement purposes and the Modified
Accelerated Cost Recovery System (MACRS) for income tax purposes.

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204. Question ID: CIA 0596 P4 Q31 (Topic: Liabilities and Taxes)
Which of the following leases would be classified as a finance lease by the lessee?
Lease A Lease B Lease C Lease D

The lease grants the lessee an option to purchase
the underlying asset that the lessee is reasonably Yes No No No
certain to exercise
The lease term is for the major part of the
No No Yes No
remaining economic life of the underlying asset
The present value of the sum of the lease
payments and any residual value guaranteed by
No No Yes Yes
the lessee amounts to at least substantially all of
the fair value of the underlying asset
 A. Lease A only.
 B. Lease B only.
 C. Leases A, C, and D.
 D. Leases C and D only.
As part of a program to increase sales, Chatham, Inc. began offering a 3-year assurance-type
warranty on all products sold after January 11 of the current year. Chatham's actual current year
sales were $3,850,000; the cost of the warranty is expected to be four percent of sales. The actual
current year warranty expenditures consisted of $45,000 in labor and $13,000 in parts. The amount
of warranty expense that should appear on Chatham's Income Statement at December 31 of the
current year is
 A. $109,000.
 B. $96,000.
 C. $154,000.
 D. $58,000.
206. Question ID: CIA 594 4.28 (Topic: Liabilities and Taxes)
Which of the following is not a criterion for classifying and accounting for a lease agreement as a
finance lease?
 A. The present value of the sum of the lease payments and any residual value guaranteed by the
lessee equals or is greater than substantially all of the fair value of the underlying asset.
 B. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
 C. The underlying asset is expected to have an alternative use to the lessor at the end of the lease
term.
 D. The lease grants the lessee an option to purchase the underlying asset and the lessee is reasonably
certain to exercise the option.

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Which one of the following statements describes the asset-liability method of accounting for deferred
income taxes?
 A. The appropriate tax rate to be reported on the income statement is the tax actually levied in that
year, meaning no deferred taxes would be reported.
 B. The amount of deferred income tax is based on the tax rates expected to be in effect during the
periods in which the temporary differences reverse.
 C. The amount of deferred income tax is based on tax rates in effect when temporary differences
originate.
 D. The tax effects of temporary differences are not reported separately but are reported as adjustments
to the amounts of specific assets and liabilities and the related revenues and expenses.
Temporary and permanent differences between taxable income and pre-tax financial income differ in
that:
 A. Temporary differences do not give rise to future taxable or deductible amounts.

 B. Only permanent differences have deferred tax consequences.
 C. Temporary differences include items that enter into pre-tax financial income but never into taxable
income.
 D. Only temporary differences have deferred tax consequences.

On July 15, a company entered into a three-month agreement to rent a machine the company
needed to complete a special order. The machine would be delivered on August 1, and rental
payments are due on the first day of each rental month. Assuming the lessee has made an
accounting policy election to not recognize lease assets or lease liabilities for short-term leases of
equipment, the effect this event would have on the company’s July 31 financial statements would be
to
 A. increase both assets and liabilities.

 B. increase both assets and income.
 C. increase liabilities and decrease income.
 D. cause no change in assets, liabilities, or income.
Equip Corp., a manufacturer of small commercial heating units, follows the generally accepted
method of accounting for assurance-type warranties in accounting for estimated future warranty
costs. The company recently designed and manufactured a new model, 250 units of which were sold
(with a one-year warranty) for $6,000 per unit during November of the current year. Estimated future
warranty costs ($150 per unit, based on past experience) were not accounted for at the time of sale,
and the company incurred no warranty cost during November and December of the current year.
The year-end adjusting entry required at December 31 of the current year to account for estimated
future warranty costs would be to
 A. Debit sales for $37,500 and credit contract liabilities for $37,500.

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 B. Debit contract liabilities and credit cash or accounts receivable for $37,500.
 C. Debit sales for $37,500 and credit assurance-type warranty liability for $37,500.
 D. Debit assurance-type warranty expense for $37,500 and credit assurance-type warranty liability for
$37,500.
211. Question ID: CIA 1192 FARE Q45 (Topic: Liabilities and Taxes)
A company is subject to assurance-type warranty claims. It is estimated that between $1,000,000
and $3,000,000 will probably be paid out. No estimate of loss within this range is a better estimate
than any other amount. The company should:
 A. Defer a loss of $1,000,000 to $3,000,000.

 B. Accrue a loss of $1,000,000.
 C. Make no journal entry at this time.
 D. Disclose only a possible loss.

Suppose that a company pays one of its liabilities twice during the year, in error. What are the
effects of this mistake?
 A. Assets and liabilities will be understated.

 B. Assets and net income and owners' equity will be understated, and liabilities are overstated.
 C. Assets, net income, and owners' equity will be unaffected.
 D. Assets, liabilities, and owners' equity will be understated.
A company has purchased an asset with a 10-year useful life. It will use an accelerated depreciation
method for tax purposes. For reporting purposes, it will use straight-line depreciation because this
method believed to reflect better the usage of the asset over its economic life.
During the 10-year life of the asset, the company will report as deferred tax an amount that
 A. Decreases and then increases.

 B. Increases steadily for the 10 years.
 C. Increases and then decreases.
 D. Is constant.
Which of the following statements is not true of a long-term operating lease?
 A. The lessee records amortization of the right-of-use asset.

 B. The lessee recognizes a right-of-use asset.
 C. The lease represents off-balance sheet financing for the lessee.
 D. The lease arrangement represents a form of financing for the lessee.

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Harrison Corporation entered into a three-year contract in which it was required under U.S. GAAP
(ASC 606), to recognize revenue and gross profit over time for financial sttement reporting as it
made progress toward satisfying its performance obligation. For income tax, however, the contract
qualified for reporting of revenue and gross profit when the performance obligation in the contract
was completely satisfied, and Harrison reported it that way on its income tax return. The effect on
Harrison's financial statements for the third year of this contract would be a(n)
 A. increase in the Deferred Tax Asset account.

 B. decrease in the Deferred Tax Asset account.
 C. increase in the Deferred Tax Liability account.
 D. decrease in the Deferred Tax Liability account.

A tax rate other than the current tax rate may be used to calculate the deferred income tax amount
on the statement of financial position if a(n)
 A. net operating loss carryback exists.

 B. future tax rate has been enacted into law.
 C. election has been made to apply past tax rates.
 D. future tax rate change is considered more likely than not to occur.
Trade accounts payable are valued on the statement of financial position at the
 A. Historical cost.
 B. Net settlement value.
 C. Current cost.
 D. Current market value.
Profitability Ratios and Profitability Analysis

218. Question ID: ICMA 19.P2.062 (Topic: Profitability Ratios and Profitability Analysis)
According to its public financial statements, a company’s gross profit margin decreased by 5% while
its operating profit margin increased by 3%. Which one of the following factors could cause both of
these changes?
 A. A lowered selling price to increase quantities sold.

 B. An increase in the cost per unit of the goods purchased from a supplier.
 C. Sale of fully-depreciated production machinery at a gain and replacement of the machines with
newer models.
 D. A change to the variable costing income statement format.

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Owners\' Equity
219. Question ID: ICMA 19.P1.007 (Topic: Owners\' Equity)
Which one of the following transactions would affect retained earnings but not additional paid-in
capital?
 A. Impairment of a long-term asset.

 B. Declaration of a small stock dividend.
 C. Purchase of treasury stock using the cost method.
 D. Decrease in the value of an available-for-sale investment.
220. Question ID: CIA 1194 P4 Q50 (Topic: Owners\' Equity)

A company has 1,000 shares of $10 par value common stock and $5,000 of retained earnings. Two
proposals are under consideration. The first is a stock split giving each shareholder two new shares
for each share formerly held. The second is to declare and distribute a 50% stock dividend. The
stock split proposal will <> earnings per share <> than will the proposal for a stock dividend.
 A. Decrease; More
 B. Increase; Less
 C. Decrease; Less
 D. Increase; More

Which of the following is usually not a feature of cumulative preferred stock?
 A. Cumulative preferred stock has the right to receive dividends in arrears before common stock
dividends can be paid.
 B. Cumulative preferred stock has priority over common stock with regard to earnings.
 C. Cumulative preferred stock has voting rights.
 D. Cumulative preferred stock has priority over common stock with regard to assets.

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222. Question ID: CMA 1289 P4 Q17 (Topic: Owners\' Equity)

Excerpts from the statement of financial position for Landau Corporation as of September 30 of the
current year are presented as follows.
Cash $ 950,000
Accounts receivable (net) 1,675,000
Inventories 2,806,000
Total current assets $5,431,000
Accounts payable $1,004,000
Accrued liabilities 785,000
Total current liabilities $1,789,000
The board of directors of Landau Corporation met on October 4 of the current year and declared the
regular quarterly cash dividend amounting to $750,000 ($0.60 per share). The dividend is payable
on October 25 of the current year to all shareholders of record as of October 12 of the current year.
Assume that the only transactions to affect Landau Corporation during October of the current year
are the dividend transactions and that the closing entries have been made.
If the dividend declared by Landau Corporation had been a 10% stock dividend instead of a cash
dividend, Landau's total shareholders' equity would have been
 A. Unchanged by either the dividend declaration or the dividend distribution.

 B. Decreased by the dividend declaration and increased by the dividend distribution.
 C. Increased by the dividend declaration and unchanged by the dividend distribution.
 D. Unchanged by the dividend declaration and increased by the dividend distribution.
223. Question ID: ICMA 1603.P1.004 (Topic: Owners\' Equity)

A publicly-traded company has 100,000 outstanding shares of common stock, with a par value of $5.
The company uses U.S. GAAP to prepare its financial statements. The company recently declared a
5% stock dividend. On the date the stock dividend was declared, the company’s stock was trading at
$25 per share. On the date of declaration, the company’s
 A. outstanding shares will decrease.

 B. total shareholders' equity will decrease.
 C. additional paid-in capital will increase.
 D. retained earnings will increase.

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Preferred and common stock differ in that:
 A. Preferred stock dividends are deductible as an expense for tax purposes, while common stock
dividends are not.
 B. Common stock dividends are a fixed amount, while preferred stock dividends are not.
 C. Failure to pay dividends on common stock will not force the firm into bankruptcy, while failure to pay
dividends on preferred stock will force the firm into bankruptcy.
 D. Preferred stock has a higher priority than common stock with regard to earnings and assets in the
event of bankruptcy.
225. Question ID: HOCK 2005 H4 (Topic: Owners\' Equity)

When cash dividends are declared, which account is affected?
 A. Additional paid-in capital.

 B. Dividends receivable.
 C. Retained earnings.
 D. Common shares.

Hessler received cash in the amount of $180,000 on March 11 for 10,000 shares of common stock
sold. Hessler's common stock has $5 per share par value. The amount recorded as a credit to
common stock for this transaction would have been
 A. $50,000
 B. $80,000
 C. $180,000
 D. $130,000

The board of directors of Markham Corp. met on May 5, 20X5 and declared a 10% stock dividend.
The dividend was distributed on May 28, 20X5 to shareholders of record as of May 15, 20X5.
As a result of this declaration and distribution, Markham's current liabilities would have been
 A. Unchanged by either the dividend declaration or the dividend distribution.

 B. Unchanged by the dividend declaration and decreased by the dividend distribution.
 C. Unchanged by the dividend declaration and increased by the dividend distribution.
 D. Decreased by the dividend declaration and increased by the dividend distribution.

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A company declares and pays both a $200,000 cash dividend and a 10% stock dividend. The effect
of the <<___>> dividend is to <<___>>.
 A. Stock; Decrease retained earnings and decrease equity

 B. Stock; Decrease retained earnings
 C. Cash; Decrease retained earnings and increase equity
 D. Cash; Increase retained earnings
229. Question ID: CMA 1292 P2 Q7 H2 (Topic: Owners\' Equity)

On December 1, Charles Company's board of directors declared a cash dividend of $1.00 per share
on the 50,000 shares of common stock outstanding. The company also has 5,000 shares of treasury
stock. Shareholders of record on December 15 are eligible for the dividend, which is to be paid on
January 1. On December 1, the company should
 A. Make no accounting entry.

 B. Debit retained earnings for $50,000 and paid-in capital for $5,000.
 C. Debit retained earnings for $55,000.
 D. Debit retained earnings for $50,000.

Brady Corporation has 6,000 shares of 5% cumulative, $100 par value preferred stock outstanding
and 200,000 shares of common stock outstanding. Brady's board of directors last declared dividends
for the year ended May 31, 20X0, and there were no dividends in arrears at that time. For the year
ended May 31, 20X2, Brady had net income of $1,750,000. The board of directors is declaring a
dividend for common shareholders equivalent to 20% of net income. The total amount of dividends
to be paid by Brady at May 31, 20X2 is:
 A. $350,000
 B. $380,000
 C. $410,000
 D. $206,000

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Cash $ 950,000
Landau Corporation's current ratio was
 A. Unchanged by either the dividend declaration or the dividend payment.

 B. Decreased by the dividend declaration and unchanged by the dividend payment.
 C. Increased by the dividend declaration and unchanged by the dividend payment.
 D. Decreased by the dividend declaration and increased by the dividend payment.

Morton Company declared and issued a 10% stock dividend during the current year. The effect of
this stock dividend on the following was:
Par Value Per Share / Retained Earnings / Total Equity
 A. Decrease / Decrease / No effect

 B. No effect / Decrease / Decrease
 C. Decrease / No effect / No effect
 D. No effect / Decrease / No effect

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On May 28, a company announced that its directors had met on May 26 and declared a dividend of
25 cents per share, payable to shareholders of record on June 20, with payment to be made on July
5. The date on which the declared dividend becomes a liability of the company is
 A. July 5.
 B. June 20.
 C. May 26.
 D. May 28.

A stock dividend
 A. increases the debt-to-equity ratio of a firm.

 B. decreases future earnings per share.
 C. decreases the size of the firm.
 D. increases shareholders' wealth.

The equity section of Smith Corporation's statement of financial position is presented below.
Preferred stock, $100 par $12,000,000

Common stock, $5 par 10,000,000
Paid-in capital in excess of par 18,000,000
Retained earnings 9,000,000
Net worth $49,000,000
The common shareholders of Smith Corporation have preemptive rights. If Smith Corporation issues
400,000 additional shares of common stock at $6 per share, a current holder of 20,000 shares of
Smith Corporation's common stock must be given the option to buy
 A. 3,333 additional shares.

 B. 3,774 additional shares.
 C. 1,000 additional shares.
 D. 4,000 additional shares.

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At December 31, a company has total assets at book value of $300,000. Liabilities are $120,000.
Also, on December 31, the stock is selling at $20 per share, and there are 10,000 shares
outstanding. As a result, the company should take the difference between the carrying amount and
market value of the stock and
 A. not capitalize any asset, record any revenue, or change equity at this time.
 B. capitalize it as an asset (and amortize over the estimated useful life), with the offset to revenue.
 C. capitalize it as an asset (and amortize over 5 years), with the offset to equity.
 D. capitalize it as an asset (and amortize over the estimated useful life not to exceed 40 years), with
the offset to equity.

The par value of common stock represents
 A. The liability ceiling of a shareholder when a company undergoes bankruptcy proceedings.

 B. The amount that must be recorded on the issuing corporation's record as paid-in capital.
 C. The estimated fair value of the stock when it was issued.
 D. The total value of the stock that must be entered in the issuing corporation's records.

Which one of the following is true regarding small stock dividends?
 A. The amount of equity capital available for future dividends is increased.

 B. Each common shareholder's percentage of ownership in the corporation increases.
 C. An amount equal to the current fair value of shares issued is transferred from retained earnings to
contributed capital.
 D. Retained earnings equal to the par value of shares issued is converted to contributed capital.

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Cash $ 950,000
Landau Corporation's working capital was
 A. Decreased by the dividend declaration and increased by the dividend payment.

 B. Unchanged by the dividend declaration and decreased by the dividend payment.
 C. Unchanged by either the dividend declaration or the dividend payment.
 D. Decreased by the dividend declaration and unchanged by the dividend payment.

The following information is available for Paragon as of November 30, 20X5.
 The market price of Paragon's common stock was $4 per share on November 30, 20X5.
 Common stock - $1 par value; 20,000,000 shares issued and outstanding - $20,000,000
 Paid-in capital in excess of par value - $12,200,000
 Retained earnings - $16,000,000
If Paragon had declared a 10% stock dividend on November 30, 20X5, retained earnings would
have been:
 A. Reduced by $8,000,000.
 B. Reduced by $6,000,000.
 C. Reduced by $1,600,000.
 D. Reduced by $2,000,000.

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Cash $ 950,000
Landau Corporation's total equity was
 A. Decreased by the dividend declaration and unchanged by the dividend payment.

 B. Decreased by the dividend declaration and increased by the dividend payment.
 C. Unchanged by either the dividend declaration or the dividend payment.
 D. Unchanged by the dividend declaration and decreased by the dividend payment.

The board of directors of Markham Corp. met on May 5, 20X5 and declared a quarterly cash
dividend in the amount of $800,000 ($0.50 per share). The dividend was paid on May 28, 20X5 to
shareholders of record as of May 15, 20X5.
Assume that the only transactions that affected Markham during May 20X5 were the dividend
transactions and that the closing entries have been made.
Markham's total equity is
 A. Increased by the dividend declaration and unchanged by the dividend payment.

 B. Unchanged by either the dividend declaration or the dividend payment.
 C. Decreased by the dividend declaration and unchanged by the dividend payment.
 D. Unchanged by the dividend declaration and decreased by the dividend payment.

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The policy decision that by itself is least likely to affect the value of the firm is the
 A. Use of a more highly leveraged capital structure that resulted in a lower cost of capital.
 B. Investment in a project with a large net present value.
 C. Distribution of stock dividends to shareholders.
 D. Sale of a risky division that will now increase the credit rating of the entire company.

Stock dividends and stock splits differ in that
 A. In a stock split, a larger number of new shares replaces the outstanding shares.
 B. A stock dividend results in a decline in the par value per share.
 C. Stock splits involve a bookkeeping transfer from retained earnings to the capital stock account.
 D. Stock splits are paid in additional shares of common stock, whereas a stock dividend results in
replacement of all outstanding shares with a new issue of shares.

Which of the following types of dividends do not reduce equity in the corporation?
 A. Liquidating dividends.
 B. Property dividends.
 C. Stock dividends and split-ups in the form of a dividend.
 D. Cash dividends.

A company has 1,000 shares of $10 par value common stock and $5,000 of retained earnings. Two
proposals are under consideration. The first is a stock split giving each shareholder two new shares
for each share formerly held. The second is to declare and distribute a 50% stock dividend.
Under the _____, the par value per outstanding share will _____.
 A. Stock split, Decrease

 B. Stock dividend, Decrease
 C. Stock split, Increase
 D. Stock dividend, Increase

When a company desires to increase the market value per share of its common stock, the company
can
 A. Implement a reverse stock split.

 B. Sell preferred stock.
 C. Sell treasury stock.
 D. Split the stock.

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Cash $ 950,000
If the dividend declared by Landau Corporation had been a 10% stock dividend instead of a cash
dividend, Landau's current liabilities would have been
 A. Increased by the dividend declaration and unchanged by the dividend distribution.

 B. Unchanged by the dividend declaration and increased by the dividend distribution.
 C. Unchanged by either the dividend declaration or the dividend distribution.
 D. Unchanged by the dividend declaration and decreased by the dividend distribution.

Which one of the following items most likely increases earnings per share (EPS) of a corporation?
 A. Payment of a stock dividend.

 C. A reduction in the amount of cash dividends paid to common shareholders.
 D. Declaration of a stock split.

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Revenue Recognition
250. Question ID: CIA 0590 P4 Q31 (Topic: Revenue Recognition)
DEF is the consignee for 1,000 units of product X for ABC Company. ABC should recognize the
revenue from these 1,000 units when
 A. ABC ships the goods to DEF.

 B. DEF sells the goods and informs ABC of the sale.
 C. DEF receives the goods from ABC.
 D. The agreement between DEF and ABC is signed.
251. Question ID: HOCK RR606.04 (Topic: Revenue Recognition)

Blue Water Shipbuilders obtained a contract to construct a cruise ship for Gateway Cruises at a
contract price of $1 billion. Blue Water's estimated cost at the inception of the contract was $800
million, so at the inception of the contract, Blue Water estimated its profit on the contract would be
$200 million. The construction was expected to require three years. The contract specified that
Gateway Cruises owned the work-in-process as the cruise ship was being built. By the end of Year
One, the engineer estimated that 20 percent of the performance obligation had been satisfied, and
Blue Water's costs totaled $285 million. Blue Water's estimated cost to complete the construction
and satisfy the performance obligation at that time was $665 million.
Blue Water recognizes revenue and gross profit on shipbuilding contracts using the cost-to-cost
input method. How much revenue and gross profit should Blue Water recognize at the end of Year
One?
 A. Revenue $200 million, gross profit $40 million.

 B. Revenue $300 million, gross profit $60 million.
 C. Revenue $300 million, gross profit $15 million.
 D. Revenue $200 million, gross profit $10 million.
252. Question ID: CMA 0696 P2 Q1 (Topic: Revenue Recognition)

Diamond Clover Construction Inc. is recognizing revenue over time on Job #4115, a long-term
contract with a contract price of $5,000,000. In Year 1, the company began work on the job. Other
data are shown below.
Year 1 Year 2
Costs incurred during the year $ 900,000 $2,350,000
Estimated costs to complete 2,700,000 0
Billings during the year 1,000,000 4,000,000
Collections during the year 700,000 4,300,000
The amount of gross profit to be recognized in Year 1 using the cost-to-cost method is:
 A. $766,667
 B. $350,000
 C. $1,400,000

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 D. $700,000

A company began work on a long-term construction contract in 20X1. The contract price was
$3,000,000. Year-end information related to the contract is as follows:
20X1 20X2 20X3

Estimated total cost $2,000,000 $2,000,000 $2,000,000
Cost incurred 700,000 900,000 400,000
Billings 800,000 1,200,000 1,000,000
Collections 600,000 1,200,000 1,200,000
If the company recognizes the revenue for this contract at a point in time, when the performance
obligations in the contract have been completely satisfied, the gross profit to be recognized in 20X3
is:
 A. $1,000,000
 B. $600,000
 C. $200,000
 D. $800,000

Allan Construction signed a $48,000,000 contract on September 1, 20X4 with the City of Springfield
to construct a tunnel under the Maple River. On that date, the estimated cost to complete the tunnel,
which was to be completed by June 20X7, was $36,000,000. Allan's fiscal year ends November 30,
and the company recognized revenue on this contract over time using the cost-to-cost method.
Data regarding the tunnel contract, which was begun December 1, 20X4, are as follows.
At November 30 (in thousands)

20X5 20X6
Actual costs to date $12,000 $30,000
Estimated costs to complete 24,000 10,000
Progress billings to date 10,000 28,000
Cash collected to date 8,000 24,000
The gross profit or loss recognized for the fiscal year ended November 30, 20X5 from the tunnel
contract using the cost-to-cost method is:
 A. $12,000,000 gross profit.

 B. $4,000,000 gross profit.
 C. $6,000,000 gross profit.
 D. $3,000,000 gross profit.

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Under ASC 606, recognition of revenue does not occur until the
 A. performance obligation is satisfied and it is probable that the company will be able to collect
substantially all of the consideration that it is entitled to receive for the goods or services that will be
transferred to the customer under a valid contract.
 B. cash is collected.
 C. performance obligation has been satisfied.
 D. entity has signed a binding contract.

On September 1, 20X4, Beach Construction Company entered into a $10 million contract with City
University to build a five-story parking garage. On that date, Beach's estimated total cost of
constructing the building was $8 million. The estimated completion date for the garage was August
20X6. Beach's fiscal year ends May 31. Because Beach's performance creates an asset that City
University controls as the work is being done, Beach accounts for the contract over time. Beach
uses the cost-to-cost method to determine the percentage of the performance obligation in the
contract that has been satisfied. Data regarding the contract are as follows.
At May 31 (in thousands of dollars)

20X5 20X6
Actual costs incurred to date $2,000 $6,750
The current assets reported on Beach Construction Company's May 31, 20X6 statement of financial
position as a result of this contract would be
 A. Accounts receivable of $6,000,000 and contract asset of $6,750,000.

 B. Accounts receivable of $500,000 and contract asset of $1,500,000.
 C. Accounts receivable of $6,000,000 and contract asset of $1,500,000.
 D. Accounts receivable of $500,000 and contract asset of $6,750,000.

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Stander Construction Company signed a contract with the state of Ohio to build a short stretch of
highway for $42 million. During 20X1, $8 million was spent and company officials anticipated that
another $24 million would be needed to complete the work. During 20X2, another $13 million was
spent and current information indicated that another $14 million would be required to finish the
project. The contract contained a clause indicating that the state of Ohio owns the work-in-process
as the highway is being constructed.
Using the cost-to-cost input method to calculate Stander's progress toward satisfaction of the
performance obligation, what amount of profit should the company recognize in 20X2?
 A. $2,600,000.
 B. Zero.
 C. $1,700,000.
 D. $4,200,000.

The ABC Company operates a catering service that specializes in business luncheons for large
corporations. ABC requires customers to place their orders 2 weeks in advance of the scheduled
events. ABC bills its customers on the tenth day of the month following the date of service and
requires that payment be made within 30 days of the billing date. Conceptually, ABC should
recognize revenue from its catering services at the date when a
 A. Customer's payment is received.

 B. Customer places an order.
 C. Luncheon is served.
 D. Billing is mailed.

A company began work on a long-term construction contract in 20X1. The contract price was
$3,000,000. Year-end information related to the contract is as follows:
20X1 20X2 20X3

Estimated total cost $2,000,000 $2,000,000 $2,000,000
Cost incurred 700,000 900,000 400,000
Billings 800,000 1,200,000 1,000,000
Collections 600,000 1,200,000 1,200,000
If the company recognizes the revenue for this contract over time using the cost-to-cost method, the
gross profit to be recognized in 20X1 is:
 A. $350,000
 B. $200,000
 C. ($100,000)
 D. $100,000

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20X5 20X6
The gross profit or loss recognized in the fiscal year ended November 30, 20X6 from the tunnel
contract is:
 A. $6,000,000 gross profit.

 B. $4,000,000 gross loss.
 C. $8,000,000 gross profit.
 D. $2,000,000 gross profit.

On May 28, Markal Company purchased a tooling machine from Arens and Associates for
$1,000,000, payable as follows: 50 percent at the transaction closing date and 50 percent due June
28. The cost of the machine to Arens is $800,000. Markal paid Arens $500,000 at the transaction
closing date and took possession of the machine. On June 10, Arens determined that a change in
the business environment has created a great deal of uncertainty regarding the collection of the
balance due from Markal, and the amount is probably uncollectible. Arens and Markal have a fiscal
year end of May 31.
The revenue recognized by Arens and Associates on May 28 is
 A. $800,000
 B. $0
 C. $200,000
 D. $1,000,000

Hock 2020 Part 1
Questions only
After a successful promotion aimed at members of a specific national association, Gorham
Publishing Company received a total of $90,000 for three-year subscriptions to a monthly publication
beginning April 1, 20X5 and properly recorded this consideration received in the contract liabilities
account. Assuming Gorham records adjustments only at the end of the calendar year, the adjusting
entry required to reflect the proper balances in the accounts at December 31, 20X5, would be to:
 A. Debit subscription revenue for $67,500 and credit contract liabilities for $67,500.
 B. Debit contract liabilities for $22,500 and credit subscription revenue for $22,500.
 C. Debit contract liabilities for $67,500 and credit subscription revenue for $67,500.
 D. Debit contract liabilities for $30,000 and credit subscription revenue for $30,000.

The practice of recording consideration received from a customer before the performance obligation
in the contract has been satisfied as a contract liability is an example of applying the
 A. Revenue recognition principle.

 B. Monetary-unit assumption.
 C. Going-concern assumption.
 D. Historic cost principle.


20X5 20X6
Assume that the estimated costs to complete at November 30, 20X6 were $20 million rather than the
$10 million shown in the given schedule. The gross loss recognized on the contract from its
inception through November 30, 20X6 is
 A. $7,500,000.
 B. $2,000,000.
 C. $1,200,000.
 D. $8,000,000.

Hock 2020 Part 1
Questions only
When the right of return exists, the contract consideration is
 A. reported as a contract liability.

 B. variable consideration and the contract price excludes the consideration for products expected to be
returned or amounts expected to be refunded.
 C. provisional and revenue cannot be recognized until the return privilege period has expired.
 D. the amount the seller expects to be entitled to receive.
266. Question ID: HI-RR0718-01 (Topic: Revenue Recognition)

A conditional contract asset is
 A. a right to receive consideration because the company has partially satisfied the performance
obligations in the contract but it must satisfy another performance obligation or obligations before it can
invoice the customer.
 B. cash consideration received by the seller before any performance obligations in the contract have
been satisfied.
 C. revenue recognized when the right of return exists.
 D. a receivable that management believes may be uncollectible.

An airline should recognize revenue from an airline ticket in the period in which
 A. Passenger reservations are confirmed.

 B. The related flight takes place.
 C. Passenger reservations are booked.
 D. The ticket is issued.

Heights Homes, Inc. is a builder that purchases building sites and builds homes on them for sale.
Most of the homes are built to an identified buyer's specifications. However, Heights Homes owns all
the properties throughout the construction period, and the buyer of a home does not obtain control of
the property until all work is complete. An identified buyer could "walk away" during the construction
period, and Heights Homes could sell the home to someone else.
On January 1, Year One, Heights Homes begins work on a home for an identified buyer for which
the contract price is $200,000. The company estimates the work will cost $192,000. During Year
One, $36,000 is spent on the work, and the company's engineers believe that work costing $144,000
remains to be completed. During Year Two, another $90,000 is spent but because of problems with
the construction, $79,000 of work is now estimated to remain.
What is the impact on net income to be recognized by Heights Homes in Year Two?
 A. $9,000 loss.
 B. Zero.
 C. $5,000 loss.

Hock 2020 Part 1
Questions only
 D. $4,000 profit.

AAA Construction Company was hired by the California state government on January 1, Year One to
build a section of a new highway. The contract price was $100 million and AAA estimated that the
work would cost $92 million. During Year One, $18 million was spent on the work and the company's
engineers believed that work costing $72 million remained to complete the work and satisfy the
performance obligation. During Year Two, another $39 million was spent and $38 million of work
was estimated to remain. The contract contained a clause indicating that the state owned the work-
in-process as the highway was being constructed.
Using the cost-to-cost input method to calculate progress toward satisfaction of the performance
obligation, what amount of profit or loss should AAA recognize on the contract in Year Two?
 A. $3,360,000 profit.
 B. $1,000,000 profit.
 C. $2,000,000 profit.
 D. $4,300,000 profit.

In accounting for long-term construction contracts, the difference between recognizing the revenue
at a point in time versus recognizing the revenue over time is that
 A. It is only when revenue is recognized over time that gross profit earned to date is accumulated in the
construction in process contract asset account.
 B. When revenue is recognized over time, all revenues and gross profit on the contract are recognized
only when the performance obligations in the contract are completely satisfied.
 C. It is only when revenue is recognized at a point in time that accumulated construction costs are
included in a construction in process contract asset account.
 D. It is only when the revenue is recognized over time that progress billings are accumulated in a
contract liability account, billings on construction in process.

According to ASC 606, under what circumstances should a long-term contract be accounted for over
time?
 A. Cash has been received from the customer.

 B. The production process can be readily divided into definite stages.
 C. The company's performance creates an asset with an alternative use to the company.
 D. The company's performance creates or enhances an asset that the customer controls as the work is
being done.

Hock 2020 Part 1
Questions only
Commercial Contractors is a commercial builder that purchases building sites and builds office
buildings on them for sale to investors. Most of the buildings are built to an identified investor's
specifications, and the investor who buys the property then leases the offices to professionals and
small businesses. However, Commercial Contractors maintains ownership of all the properties
throughout the construction period, and the investor does not obtain control of the property until all
work is complete. An identified investor could "walk away" during the construction period, and
Commercial Contractors could sell the building to another investor.
On January 1, Year One, Commercial Contractors begins work on an office building for an identified
investor for which the contract price is $10,000,000. The company estimates the work will cost
$9,200,000 and require three years to complete. During Year One, $1,800,000 is spent on the
construction, and the company's engineers believe that work costing $7,200,000 remains to be
completed. During Year Two, another $3,900,000 is spent and $3,800,000 of work is now estimated
to remain.
What is the impact on net income to be recognized by Commercial Contractors in Year Two?
 A. $200,000.
 B. $100,000.
 C. Zero.
 D. $500,000.

On September 1, 20X4, Beach Construction Company entered into a $10 million contract with City
University to build a five-story parking garage on the university's campus. On that date, Beach's
estimated total cost of constructing the building was $8 million. The estimated completion date for
the garage was August 20X6. Beach's fiscal year ends May 31. Because Beach's performance
creates an asset that City University controls as the work is being done, Beach accounts for the
contract over time. Beach uses the cost-to-cost method to determine the percentage of the
performance obligation in the contract that has been satisfied. Data regarding the contract are as
follows.
At May 31 (in thousands of dollars)

20X5 20X6
Actual costs incurred to date $2,000 $6,750
The gross profit recognized for the fiscal year ended May 31, 20X6 from this contract would be
 A. $1,000,000
 B. $750,000
 C. $250,000
 D. $500,000
Hock 2020 Part 1
Questions only
A company provides fertilization, insect control, and disease control services for a variety of trees,
plants, and shrubs on a contract basis. For $50 per month, the company will visit the subscriber's
premises and apply appropriate mixtures. If the subscriber has any problems between the regularly
scheduled application dates, the company's personnel will promptly make additional service calls to
correct the situation. Some subscribers elect to pay for an entire year because the company offers
an annual price of $540 if paid in advance. For a subscriber who pays the annual fee in advance, the
company should recognize the related revenue
 A. When the cash is collected.

 B. At the end of the fiscal year.
 C. Evenly over the year as the services are performed.
 D. At the end of the contract year after all of the services have been performed.

AAA Construction Company was hired by the California state government on January 1, Year One to
build a section of a new highway. The contract price was $100 million and AAA estimated that the
work would cost $96 million. During Year One, $18 million was spent on the work and the company's
engineers believed that work costing $72 million remained to complete the work and satisfy the
performance obligation. During Year Two, another $45 million was spent and $42 million of work
was estimated to remain. The contract contained a clause indicating that the state owned the work-
in-process as the highway was being constructed.
Using the cost-to-cost input method to calculate progress toward satisfaction of the performance
obligation, what amount of profit or loss should AAA recognize on the contract in Year Two?
 A. $2,000,000 profit.
 B. $4,760,000 profit.
 C. $7,000,000 loss.
 D. $5,000,000 loss.

Hock 2020 Part 1
Questions only
Diamond Clover Construction Inc. is recognizing revenue at a point in time on Job #4115, a long-
term contract with a contract price of $5,000,000. In Year 1, the company began work on the job.
Other data are shown below.
Year 1 Year 2
Costs incurred during the year $ 900,000 $2,350,000
Estimated costs to complete 2,700,000 0
Billings during the year 1,000,000 4,000,000
Collections during the year 700,000 4,300,000
The total amount to be recognized as gross profit in Year 2 using the cost-to-cost method, when the
contract's performance obligations have been satisfied, is:
 A. $700,000
 B. $2,650,000
 C. $1,400,000
 D. $1,750,000


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Hock 2020 Part 1

Section A – External Financial Reporting Decisions

Financial Statements - Other Than Statement of Cash Flows

 A. analyze the company’s performance compared to the budget.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. decide whether to settle a liability or write it off.

 A. As part of sales revenue on the current year income statement.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. Managers in charge of operating activities.

 A. quality of the earnings reported for the enterprise.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. going concern concept.

 A. generally accepted accounting principles.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. Operating expenses will be reduced by $300,000.

 A. Total current assets.

 A. has been replaced in accounting records by a system of current cost accounting.

 A. The entity will continue in existence forever.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. An increase in a liability from incidental transactions.

 A. $28 million in outstanding bonds trading at $98.

 A. $600,000 should be reported as an unusual or infrequent loss.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

Financial Statements - Statement of Cash Flows

 A. The payment of interest expense of $200,000.

Dividends paid to Carlson shareholders $150,000

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. Payment of salaries and wages.

Net income $2,000,000

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 Accounts receivable decreased from $115,000 on December 31, 20X0 to $100,000 on

 A. cash used of $582,000.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. A loss on the sale of plant assets.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

Net income $70,000

 Collections of $100,000 for goods sold to customers.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. increase in income tax payable.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 Accounts receivable decreased from $115,000 on December 31, 20X0 to $100,000 on

 A. financing section, as a use or outflow of cash.

Net income $2,000,000

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

Depreciation on fixed assets $1,500,000

 A. balance at the end of the period.

 A. (1) Add (2) Add

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 Accounts receivable decreased from $115,000 on December 31, 20X0 to $100,000 on

Interest paid on bank loan $300,000

 A. Interest received on investments in bonds.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

Proceeds from issuance of preferred stock $4,000,000

 A. $900,000 and $3,600,000.

 A. Income tax refund.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

 A. deduction from net income.

 A. No effect on cash flow amounts.

‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬

Purchase Trillium stock $300,000